How Business Owners Can Legally Pay Their Kids and Build Tax-Free Wealth
- Billy Amberg
- Apr 11
- 4 min read
A Real-World Case Study: Setting Up a Tax-Advantaged Strategy
Meet Jim. He’s a business owner in his late 40s, newly married, and the father of 12-year-old twins. Jim owns a manufacturing company, and we helped him implement a tax-savvy strategy that benefits both his business and his children’s financial future.
Here’s what we did:
Jim pays his kids to clean the administrative building of his manufacturing plant (not the actual plant, which would be unsafe for minors).
Each child earns $8,000 per year for their work.
This setup allows them to build substantial wealth over time while benefiting from tax-free earnings.
The result? Each child could accumulate around $2 million in today’s dollars by the time they reach retirement age—completely tax-free! Sounds great, right? Let’s break down how this works.
Why Paying Your Kids Through Your Business Is a Smart Move
Many business owners overlook this powerful strategy to build tax-free wealth for kids. Here’s why it works:
Legitimate Work, Legitimate Pay
Kids must perform real work—you can’t pay them $500 an hour for legal advice or a token chore.
The work should have comparable market rates—for example, commercial cleaning rates adjusted for a 12-year-old’s skill level.
Tax-Free Income for Your Kids
Because their earnings fall below the standard deduction, they typically won’t owe federal income taxes.
They receive earned income, allowing them to contribute to a Roth IRA.
Tax Benefits for Business Owners
Jim’s business gets a tax deduction for the wages paid to his kids (though minor, it’s still beneficial).
Shifting income to lower tax brackets reduces overall tax liability.
How to Build Tax-Free Wealth for Kids Properly
To maximize the benefits and stay compliant with tax laws, follow these best practices:
Document Everything:
Keep records of work performed, hours worked, and wages paid.
Issue proper tax forms (e.g., 1099 or W-2, depending on business structure).
Use Reasonable Pay Rates:
Compare market rates and adjust for a child’s ability.
Avoid excessive wages that could trigger IRS scrutiny.
Work with a CPA:
A knowledgeable tax professional ensures compliance and helps maximize benefits.
The Power of Compound Growth in a Roth IRA
One of the biggest advantages of this strategy is tax-free growth in a Roth IRA. Here’s a simple projection:
$8,000 per year invested in a Roth IRA
8% average annual return (historical S&P 500 rate)
Over 50+ years, this could grow to $2 million+ per child, completely tax-free!
This strategy leverages time and compound interest to build generational wealth.
Is This Strategy Right for You?
While this method worked well for Jim, it’s not a one-size-fits-all approach. Factors such as business structure, tax situation, and work eligibility vary. If you’re interested, I’d be happy to do a free analysis to see if this strategy works for you.
Want to learn more about the power of Roth? Check out our article breaking down how a Roth Conversion is going to create generational wealth for a family.
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