Hire your kid. Then build a $1M Roth.
The standard "hire your kid" page covers the first move. This is the advanced playbook: stack the Roth IRA, layer a Solo 401(k), pay college tax-efficiently, and turn a $14K/yr W-2 into a million-dollar tax-free retirement by age 26.
The 60-second pitch
You already read the core "Hire Your Kids" strategy — the part where you deduct your kid's wages against your business income and they pay $0 federal tax up to the standard deduction. That's level 1.
Level 2 is what the wealthy actually do with it. The wages you paid the kid become earned income — which means the kid is now eligible to contribute to a Roth IRA. Up to the lesser of $7,000 (2025) or 100% of earned income. The Roth is funded with already-tax-free dollars (because the kid was under the standard deduction), it grows tax-free for 50+ years, and withdraws tax-free after 59½.
Level 3: open a Solo 401(k) for the kid if their wages exceed the Roth IRA cap. The Solo 401(k) lets the kid contribute up to $23,500 (2025) of their own wages as employee deferral — but only if they're actually self-employed or you set up a one-participant plan structure correctly. Most families stop at the Roth.
Level 4: the tuition trick. When the kid hits college age, you stop paying their tuition with after-tax dollars. Instead, you pay them more W-2 wages, they pay tuition with their own (basically-untaxed) wages, and the family-net cost of college drops significantly.
The math gets ridiculous. A dentist pays her 16-year-old son $14,000/yr to do scanning, intake, and back-office work for 10 years. Son contributes $7,000/yr to a Roth IRA. By 26, he has ~$110K of Roth contributions + growth. Hands off until 65 at 8% = ~$1.1 million, all tax-free, all from family dollars that were already going to be spent.
Real-world example
The setup. Dr. Patel runs a solo dental practice taxed as a sole prop (Schedule C). Her son Arjun is 16. He helps with patient intake, sterilization tray prep, intraoral scanning entry, and Instagram content. She pays him a real W-2 wage commensurate with the work.
The wage. $14,000/yr. Because the practice is a sole prop owned by his parent, FICA is exempt under IRC §3121(b)(3)(A) (and FUTA under §3306(c)(5)). Arjun's federal income tax = $0 (the standard deduction shields it).
The Roth. Arjun opens a custodial Roth IRA at Fidelity. He contributes $7,000/yr — the 2025 cap, and well within his $14K earned income. Mom can gift him the cash to fund it; the money has to come from somewhere but only the earned income requirement governs the cap.
The compounding. From age 16 to 26, Arjun contributes $7K/yr × 10 years = $70,000 of basis. At 8% average return, the account is worth ~$110,000 at age 26. He stops contributing at 26 (now in the workforce above income limits). He never touches it.
Age 65. $110K compounded at 8% for 39 more years = ~$2.3 million. At a more conservative 7%: ~$1.6M. All tax-free. (Conservative aggregate: ~$1.1M is a reasonable mid-case if he pulls a small amount for a first-home down payment under the §72(t)(2)(F) first-time homebuyer carve-out.)
The college overlay. When Arjun starts college at 18, Dr. Patel keeps him on payroll at $20K/yr (his work hours scale up; he does her social media, billing, and patient outreach remotely). His standard deduction is $14,600+; he owes minimal tax. He uses his wages to pay tuition. Family-net cost of college: roughly his marginal federal rate (10%) on the excess over the std deduction — much cheaper than Mom paying tuition out of 37%-bracket personal dollars.
The step-by-step checklist
- Confirm your business entity qualifies for the FICA exemption. Sole proprietorships and single-member LLCs (taxed as sole prop) owned by the kid's parent(s) — yes. Partnerships where both partners are the kid's parents — yes. S-corps and C-corps — NO, FICA applies. Read the core Hire Your Kids page.
- Set up real payroll. Run wages through Gusto, OnPay, or similar. W-2 at year-end. Quarterly 941 (or annual 944) for federal income tax withholding (usually $0). State payroll registration too.
- Document the work. Job description, time sheets, hourly rate justified by market data. The Tax Court has knocked out fictional kid wages — see Eller v. Commissioner, Renfro. Real work product is non-negotiable.
- Pay the wage out of business bank → kid's bank. Don't hand them cash. Don't pay their phone bill and call it wages. The transfer must look like a paycheck.
- Open the custodial Roth IRA. Fidelity and Schwab both offer custodial Roth IRAs for minors at no cost. Parent is the custodian until the kid hits the state's age of majority (18 in most states, 21 in some).
- Contribute up to the cap. 2025: $7,000 or 100% of earned income, whichever is less. The contribution money doesn't have to literally trace from the kid's bank — you can fund it as a gift to him. The earned-income cap is the only restraint.
- Don't over-contribute. 6% excise tax under §4973 per year on excess Roth contributions until removed. Tools like Fidelity flag this; verify.
- Invest broadly. A custodial Roth invested in a low-cost total-market index fund (VTI, FZROX) for a teenager is one of the most efficient pieces of personal finance ever designed. 50-year compounding curve.
- Stack a Solo 401(k) at age 18+ if the kid runs side income. If your 18-year-old has a real freelance gig (lifeguard team manager, tutoring business), they can establish their own Solo 401(k) with up to $23,500 (2025) employee deferral + 25% employer contribution. Most families don't reach this; the Roth IRA is plenty.
- Plan the college handoff. When the kid hits college, scale up legitimate work hours so the kid can pay tuition from their own wages. AOTC may still apply (parent claims it if the kid is a dependent).
- Watch the kiddie tax (§1(g)). Unearned income (interest, dividends, capital gains) on the kid's investment accounts above $2,700 (2025) gets taxed at the parents' rate. Roth growth is tax-free — kiddie tax irrelevant inside the Roth. But taxable brokerage gifts to kids do trigger it.
- Watch state law. Some states (CA, NY, NJ) have stricter rules on hours for minors and may require working papers. Your kid's wage is real wage; it has real labor-law overhead.
IRS code & authority
- IRC §3121(b)(3)(A) FICA exemption for services by a child under 18 employed by a parent's sole prop or partnership of parents.
- IRC §3306(c)(5) Parallel FUTA exemption for child wages.
- IRC §63(c) Standard deduction — the $14,600 (2024) / $15,000 (2025) shield against the kid's earned income.
- IRC §219 Roth IRA contribution rules — the lesser of the dollar cap or earned income.
- IRC §408A Roth IRA tax-free treatment.
- IRC §72(t)(2)(F) First-time homebuyer Roth exception — up to $10K of earnings tax/penalty-free for a first home.
- IRC §1(g) Kiddie tax — unearned income of dependents above ~$2,700 (2025) taxed at parents' rate.
- IRC §162 Ordinary and necessary business expense — kid's wage must be reasonable.
- Eller v. Commissioner Tax Court cases requiring real services for real wages.
Audit risk flags
- No documented services. The single biggest audit kill. Defense: Job description, time logs, work products (screenshots, photos, completed tasks), reasonable hourly rate.
- Wage above-market. $50/hr for a 12-year-old to "manage social media" doesn't pass Eller's reasonableness test. Defense: Benchmark the rate to BLS data or sites like Glassdoor.
- S-corp owner trying the FICA exemption. Doesn't work — the §3121(b)(3)(A) exemption only applies to sole props and 100%-parent partnerships. Defense: If you're an S-corp and want this, route the kid's payroll through a sister sole-prop entity (a separate management LLC) the kid actually works for.
- Excess Roth contribution. Kid earned $5,000 but you funded $7,000 — $2,000 excess + 6% excise per year. Defense: Match Roth contribution ≤ documented W-2 wages.
- Kiddie tax surprise on non-Roth accounts. Gifting appreciated stock to a kid to "shift gains" — bad idea above $2,700/yr unearned income. Defense: Keep the Roth tax-free shell; use 529 or Coverdell for the tax-advantaged growth bucket.
- State labor law violations. Minor hour limits, working papers, school-year-vs-summer caps. Defense: Run hours past your state's child labor rules; never pay for hours that would be illegal to work.
When NOT to do this
- You don't own the business. W-2 employees don't have this lever. The strategy depends on a Schedule C or partnership where you can decide to put your kid on payroll.
- The kid is under ~9 or has no real capacity to work. Pay your 6-year-old $14K to "be in stock photos" and you've just gift-wrapped an IRS examination.
- Your business is an S-corp without a sister entity. Direct kid payroll out of an S-corp loses the FICA exemption — savings collapse.
- You need the kid's W-2 for college financial aid. FAFSA counts the child's income at 50% in EFC. A $14K W-2 can wipe out $7K of need-based aid eligibility — possibly more than the tax savings.
- You won't run real payroll. Cash "paychecks" without W-2 filings is not the strategy — it's a fraud risk.
PilePilot tracks family payroll + Roth basis.
PilePilot books your kid's wages as a real W-2 line, watches the Roth IRA contribution cap, and flags S-corp / sister-entity issues before they bite you in audit. Plus the standard "hire your kids" math is on the core page.
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Disclaimer. Educational, not tax advice. The FICA exemption, kiddie tax, and Roth contribution rules have facts-and-circumstances applications. Always run real payroll, document work, and confirm entity structure with a qualified tax professional.