How Business Owners Can Pay Their Kids and Build Them a Tax-Free Nest Egg(Part 2)

If you're a business owner and a parent, you have a unique opportunity sitting right in front of you: you can legally pay your child through your business and use that income to kickstart a tax-free nest egg that could grow for decades.

Yes, this is a real strategy — and no, it’s not just for the ultra-wealthy.

With a little planning and the right structure, you can reduce your tax liability, shift income to a lower bracket, and give your child a massive head start toward long-term financial freedom. Here’s how it works — and why 2025 may be the best time to start.

Step 1: Pay Your Child Through Your Business (the Right Way)

Under IRS rules, children who earn income are subject to taxes like any other taxpayer. But because of the standard deduction, the first $15,000 of income your child earns in 2025 is tax-free if it's their only income source. That means if you pay your child $15,000 or less, neither of you owes federal income tax on it.

But it must be:

• For legitimate work (marketing, cleaning, modeling, product photos, etc.)

• At a reasonable wage based on age and task

• Properly documented (time tracking, job descriptions, W-2 or 1099 depending on your business type)

If your business is a sole proprietorship, single-member LLC, or partnership where both spouses own the business, you're also exempt from paying FICA payroll taxes (Social Security and Medicare) on their wages if they're under 18. If you're an S-Corp or C-Corp, FICA still applies — but the overall strategy can still make sense depending on your income and planning goals.

Step 2: Contribute to a Roth IRA for Your Child

If your child has earned income, they’re eligible to contribute to a Roth IRA — one of the most powerful tools in long-term wealth building. Contributions are made with after-tax dollars, and the money grows tax-free. Even better? Withdrawals in retirement are also tax-free (as long as they’re made after age 59½ and meet the 5-year rule).

In 2025, the contribution limit is $7,000, or your child’s total earned income — whichever is less.

So if you pay your child $15,000, they can stash away $7,000 into a Roth IRA. You can even gift them the money to fund the Roth (as long as they have earned income to support the contribution).

Let’s say your child contributes $7,000/year from age 8 to 18. That’s $77,000 invested — and if it grows at a 7% average annual return, by age 59½, it would be worth over $1.1 million tax-free.

That’s the power of time and tax-free growth.

Step 3: Invest the Remaining Income in a Brokerage Account

After funding the Roth IRA, your child still has up to $8,000 of income remaining (using the $15,000 total example). That money can be invested in a custodial taxable brokerage account, which can be used for anything — college, a first home, launching a business, or more investing.

While brokerage accounts don’t offer tax-deferred growth, they provide flexibility and can be accessed at any time without penalties.

And if held long enough, gains are taxed at long-term capital gains rates — potentially 0% if your child remains in a low tax bracket for a while. This account gives them freedom and options far earlier than a retirement account would.

Long-Term Wealth Example: What This Looks Like Over Time

Let’s say you use this strategy from ages 8 through 18:

• Pay your child $15,000/year

• Contribute $7,000/year to a Roth IRA

• Invest the remaining $8,000/year into a taxable brokerage account

Here’s what that could turn into:

Roth IRA by Age 59½:

• $77,000 contributed over 11 years

• Grows at 7% annually

• Ends up over $1.1 million tax-free

Brokerage Account by Age 40:

• $88,000 invested by age 18

• No additional contributions after that

• Grows at 7% annually for 22 years

• Ends up around $345,000

That’s nearly $1.5 million in total assets — built entirely from tax-free wages and long-term planning.

Why This Strategy Works

• Tax savings now: You reduce your business's taxable income.

• Tax-free growth later: Roth IRA and long-term capital gains treatment.

• Educational value: Kids learn the power of work, saving, and investing.

• Legacy planning: This is how generational wealth starts — not with inheritance, but intention.

Final Thoughts

As a business owner, you already have more flexibility than most when it comes to taxes and income. Why not use that same flexibility to help your children build wealth while lowering your own tax bill?

This strategy isn’t complicated — but it does need to be implemented carefully. The IRS has rules, and you’ll want to document everything to stay compliant.

Done right, you’re not just paying your kid — you’re giving them a 30-year head start.

At WealthBound, we pride ourselves on helping families create lasting impact and legacy, schedule a free consultation here

Disclaimer: This blog is for educational purposes only and does not constitute financial advice. Please consult with your advisor, tax professional, or mortgage lender before making a major purchase decision.