Q: I want to employ my kids in my business, can I just put the money in their bank account?

A: Great idea! Employing your kids can be very rewarding for them and help them learn many life lessons, as well as a good chance to spend more time with them.  And the tax benefits can be substantial.  But – and it’s a big but – they have to actually do the work for you to get the tax benefits.

Don’t think for a minute that this will somehow slip by the IRS.  Here is a link to IRS guidance on the issues: https://www.irs.gov/newsroom/tax-treatment-for-family-members-working-in-the-family-business

For my clients, I highly recommend (and help them do it) following all the same steps that you would with any other employee.  Write a job description, interview them and document why they are a good fit for the job.  List out the job duties, then have them sign an employment agreement.  You don’t have to overthink it, ChatGPT or a simple google search can get you 90% of the way there.

Once you have a signed employment agreement, do the i-9 and w-4.  If they are going to earn less than the standard deduction, they shouldn’t have any withholding.  If they are under 18, you also don’t have to worry about payroll tax (unless your company is a c- or s- corp, or you have partners that aren’t the child’s parents).

Then create a time card and have them fill it out when they do the work.  You approve it when its done. And don’t forget payroll tax filings, if appropriate.

So – back to the questions – once you have done all of the above, then yes, the business can pay the child by depositing the money into the child’s bank account and the child’s bank account can be used to pay their expenses such as after school sports, a car payment, or summer camps.   

Of course, as with everything on this site, there is often more to the story. Make sure you consult with a professional prior to taking any action.