How to Pay for Your Child’s Education and Car AND Get a Tax Deduction

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Are you this type of parent?

You make a deal with your daughter that if she works at the family doughnut shop every day after school, for every dollar she saves in a joint bank account, you’ll match it so she can buy her first car.

You figure it’s a win-win for everyone. She learns the value of hard work, you don’t have to hire extra help down at the shop and she gets the car she wants. Besides, she’ll take better care of that car having worked so hard to earn it.

Now, what if Uncle Sam could help pay for that car? “Count me in!” you shout excitedly.

Well . . . believe it or not . . . there is a way to get Uncle Sam to help your children pay for that car and even for tuition for college they can drive that car to.

For those of us who own businesses and have children, we can think of several benefits to hiring our kids to work by our sides in the family business:

  • They get to spend quality time with us.
  • Learn the value of hard work.
  • Get to see up close the intricacies of running a successful business.

Besides the personal benefits of hiring your children to work for you, there are also tax benefits. Some might cry foul at giving business owners tax breaks for hiring their children, but they can’t be blamed for playing the game. They didn’t make the rules. They just play by them.

If there are tax benefits to hiring your children, what are those tax benefits and how do you take advantage of them?


To take advantage of the tax benefits from hiring your children, your business has to be set up as either a sole proprietorship (or joint partnership with your spouse) or an LLC that elects to be treated as a sole proprietorship (or joint partnership with your spouse).

Profits and losses from this type of business structure are reported on Form 1040, Schedule C.


If you hire your children as employees to do legitimate work in your business, you may deduct their salaries from your business income as a business expense. Moreover, if your child is under 18, you won’t have to withhold or pay any FICA (Social Security or Medicare) tax on their income or FUTA (unemployment tax).

This is a great tool for shifting part of your business income from your tax bracket to your child’s bracket, which should be substantially lower than your own.

In addition to being exempt from FICA (under 18) and FUTA (under 21), because of the standard deduction, your child can earn up to $12,400 tax-free for 2020. In other words, your child can earn up to $12,400 a year and not owe any tax on that income. Between the FICA/FUTA exemptions and the standard deduction, that’s a good chunk of income tax that can be reduced by shifting income from you to your kids.


Child – Under 18

Tax Rate: 37% (Highest Bracket)

FICA/FUTA: 12.4% (Combined)

Standard Deduction: $12,400

Child’s Income: $12,400

Income Tax Savings: $4,588.00 ($12,400 X .37)

FICA/FUTA Savings: $1,537.60 ($12,400 X .124)

Total Tax Savings: $6,125.60

If you hire your child to work for you, you can save up to $6,125.60 a year in taxes on income up to $12,400 a year. What if you hired three kids? The savings would be $18,376.80.

You know that old saying, “pigs get fat, hogs get slaughtered?” The same applies to child employee tax rules. In other words, no funny business. The IRS is more likely to look closer at payrolls with employees with the same last name.

How do you stay out of trouble? Treat your children just like any other employee. Pay them a fair wage for fair work.

Follow these simple rules:

  • Your child must be an actual employee doing necessary work for your business. No fake jobs. Playing video games in the company lounge doesn’t count.
  • Your child must be seven years or older to be considered a valuable employee. That’s a pretty low threshold, but no hiring two-year-olds. Your seven-year-old still may be able to perform useful services for your business.
  • Your child must be making a reasonable salary for the work they’re doing. In other words, you can’t pay your kid $1,000 a month to head your company’s Oreo Cookie Eating Division. Pay your kid the same amount that you would pay any employee for the work they’re doing.
  • Follow all federal, state, and legal rules regarding employment. Make sure your kid fills out all required paperwork and that all appropriate documentation is filed with the appropriate government divisions.

That’s how you can get Uncle Sam to pay for your child’s education and a car!

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