For many business owners, employing a child can serve two purposes at once. It gives the child practical work experience and an opportunity to earn their own money, while also creating a potential tax deduction for the business.
It may create another valuable opportunity as well: the earned income needed to fund a Roth IRA.
Suppose a business owner’s teenage child helps with filing, social media, inventory, cleaning, or another task the business genuinely needs. The business may be able to pay the child a reasonable wage and deduct that compensation as a business expense.
The child now has documented earned income. That income may be used to establish and contribute to a custodial Roth IRA, potentially giving the child several additional decades of tax-free growth.
In 2026, an individual can contribute up to $7,500 to a traditional or Roth IRA, limited to the amount of taxable compensation earned during the year. A child who earns $5,000 can contribute no more than $5,000. A child who earns at least $7,500 may be eligible to make the full contribution.
The child does not necessarily have to deposit their own paycheck into the account. Parents may provide the money for the Roth contribution while allowing the child to keep or spend their earnings. The contribution simply cannot exceed the child’s qualifying compensation for the year.
Why a Roth can be so powerful
The immediate business deduction may be helpful, but the greater benefit may be the child’s exceptionally long investment horizon.
Consider a 15-year-old who contributes $7,500 to a Roth IRA. Assuming a hypothetical 8% annual return, that single contribution could grow to approximately $352,000 by age 65, without any additional contributions.
Because Roth contributions are made with after-tax dollars, qualified withdrawals in retirement can generally be received tax-free. Starting early gives even modest contributions decades to compound.
Does the child owe taxes?
Possibly, but not necessarily.
A dependent child’s 2026 standard deduction is generally limited to the greater of $1,400 or earned income plus $450, up to the regular $16,100 standard deduction for a single filer. As a result, a child whose income comes primarily from wages may owe little or no federal income tax. However, investment income, withholding, state taxes, and other circumstances can affect whether a return should or must be filed.
Payroll taxes depend partly on how the business is structured. Wages paid to a child under age 18 by a parent’s sole proprietorship—or by a partnership owned solely by the child’s parents—are generally exempt from Social Security and Medicare taxes. Wages paid to a child under age 21 may also be exempt from federal unemployment tax.
Those exemptions generally do not apply when the child is employed by an S corporation, C corporation, or a partnership that includes non-parent owners. The Roth opportunity may still exist, but normal payroll taxes generally apply.
The job has to be real
Parents cannot create earned income simply by transferring money to a child. The child must perform genuine, age-appropriate work, and the compensation must be reasonable for the services provided.
Business owners should maintain payroll records, time sheets, job descriptions, evidence of completed work, and support for the wage rate. The child should be treated like a real employee because, for tax purposes, that is exactly what they are.
Done correctly, employing a child can create a current business deduction and an extraordinary long-term savings opportunity. But before adding a child to the family payroll, coordinate with a financial professional to make sure the work, wages, reporting, and business structure support the strategy.