Your neighbor just hired his 15-year-old to "work" in his business. Your accountant friend mentioned something about "shifting income to lower brackets." And now you're wondering: Is this legitimate, or is everyone playing games with the IRS?

Here's the truth: Hiring your kids is one of the most powerful, perfectly legal tax strategies available to small business owners—but 90% of contractors implement it wrong and get audited.

The difference between a $14,000 annual tax savings and a $47,000 IRS penalty? Proper documentation and understanding the rules.

Des Moines business owners who master family employment strategies consistently save $10,000-$20,000 annually while building tax-free wealth for their children. Those who wing it? They're writing checks to the IRS for back taxes, penalties, and interest.

This isn't about gaming the system. It's about using the tax code exactly as Congress intended: encouraging family businesses to employ and train the next generation.

The Tax Strategy Congress Actually Wants You to Use

Most contractors view tax law as the enemy. But buried in the IRS code is one of the most generous provisions ever created for family business owners: the ability to hire your children and shift income from your 35-37% tax bracket into their 0% tax bracket.

Why Congress Created This Opportunity

The IRS explicitly encourages family employment because it:

• Teaches children work ethic and business skills
• Keeps money within family units
• Provides legitimate income for education and retirement savings
• Supports the continuity of family businesses across generations

According to IRS guidance on family employees, hiring your children is not only permitted—it's specifically addressed with favorable tax treatment.

The result: Your teenager can earn up to $15,000 in 2025 (the standard deduction amount) and pay zero federal income tax.

Let that sink in. Zero.

The Real Numbers That Make CPAs Drool

Ankeny remodeling contractor Mike Chen has three kids (ages 14, 16, and 17). His business generates $380,000 in annual profit.

Before Hiring His Kids:

• Business income: $380,000
• Federal tax (35%): $133,000
• Iowa tax (8.53%): $32,414
• Self-employment tax (15.3%): $58,140
• Total tax bill: $223,554

After Hiring His Kids:

• Pays each child $13,000 annually
• Total wages to kids: $39,000
• Business income: $341,000 (reduced by wages)

Mike's New Tax Bill:

• Federal tax on $341,000: $119,350
• Iowa tax: $29,087
• Self-employment tax: $52,173
• Total tax bill: $200,610

Tax Savings: $22,944

Kids' Tax Bill:

• Each earns $13,000
• Standard deduction: $15,000
• Taxable income: $0
• Kids' tax bill: $0

Mike's family keeps an extra $22,944 that would have gone to the IRS.

But wait—it gets better.

The Retirement Wealth Multiplier

Mike's kids take their $13,000 earnings and contribute to Roth IRAs.

Annual Roth IRA contributions: $13,000 × 3 kids = $39,000
Years until retirement: 50 years (age 17 to 67)
Average return: 8%

Result: Those annual $39,000 contributions become $19,127,000 in tax-free retirement wealth by the time Mike's kids reach 67.

Read that again. Nearly $20 million in tax-free wealth created by shifting income the IRS was going to take anyway.

This is why construction contractors who understand family employment strategies consistently build multi-generational wealth while their competitors struggle.

The 4 Critical Rules That Keep You Out of Trouble

The IRS audits family employment aggressively because so many business owners implement it wrong. Follow these four rules, and you'll be bulletproof. Violate them, and you're writing a check to the IRS.

Rule #1: The Work Must Be Legitimate

Your 10-year-old cannot be your "marketing consultant." Your 12-year-old shouldn't be your "chief strategy officer."

Legitimate Work Examples by Age:

Ages 7-10:

• Filing and organizing paperwork
• Shredding old documents
• Cleaning and organizing the office
• Basic data entry (with supervision)
• Modeling for marketing materials

Ages 11-13:

• Social media content creation
• Website updates and blog posting
• Inventory management
• Customer service and phone answering
• Photography for projects/marketing

Ages 14-17:

• Bookkeeping and data entry
• Job site cleanup and organization
• Material delivery and pickup
• Equipment maintenance
• Administrative support
• Marketing and advertising work

Ages 18+:

• Any business function they're qualified for
• Project management
• Skilled trades work
• Sales and client relations
• Full administrative responsibilities

West Des Moines painting contractor Sarah Williams hired her 16-year-old son to manage their social media, photograph completed projects, and organize the shop. Legitimate work? Absolutely. Would pass an audit? Yes.

Compare that to the contractor who paid his 8-year-old $25,000 as a "business consultant." The IRS disallowed every dollar plus penalties.

Rule #2: The Compensation Must Be Reasonable

"Reasonable" means what you'd pay a non-family member to do the same work.

2026 Reasonable Wages by Age and Role:

Ages 7-10:

• $8-12/hour for basic tasks
• Maximum realistic annual wages: $2,000-4,000

Ages 11-13:

• $10-15/hour for entry-level work
• Maximum realistic annual wages: $4,000-8,000

Ages 14-17:

• $12-20/hour depending on skills and responsibility
• Maximum realistic annual wages: $8,000-15,000

Ages 18+:

• Market rate for the position and experience level
• $15-30/hour for skilled positions

The Audit Red Flag:

Paying your 13-year-old $30,000 annually for "computer work" is asking for trouble. The IRS will compare your child's compensation to:

• What you pay non-family employees for similar work
• Prevailing wages in your market
• Industry standards for the type of work
• Your child's age, skills, and experience

Johnston HVAC contractor Tom Bradley paid his 15-year-old daughter $18/hour to manage scheduling, answer phones, and handle basic bookkeeping. Market rate for office work in Johnston? $16-20/hour. Reasonable? Yes. Audit-proof? Absolutely.

Rule #3: You Must Have Bulletproof Documentation

This is where 80% of contractors fail and get destroyed in audits.

Required Documentation:

Written Job Description:

• Specific duties and responsibilities
• Required skills and qualifications
• Expected hours and schedule
• Reporting structure

Time Records:

• Contemporaneous time tracking (recorded as work happens, not weeks later)
• Detailed description of tasks performed
• Signed by both child and supervisor
• Maintained for at least 7 years

Payroll Records:

• Payments made through proper payroll system
• W-2 issued annually
• Federal and state tax withholding (if required)
• Quarterly 941 filings
• Year-end reconciliation

Work Product Evidence:

• Photos of completed work
• Samples of marketing materials created
• Social media posts they managed
• Documents they prepared
• Before/after photos of organized spaces

The Audit Story That Keeps CPAs Awake:

Grimes contractor hired his 14-year-old and 16-year-old kids. Paid them through payroll. Issued W-2s. Everything seemed correct.

Then the IRS audited.

IRS requested:

• Time sheets? "We didn't keep any."
• Job descriptions? "It was just helping out."
• Evidence of work performed? "They cleaned the shop."
• Photos? Records? Documentation? Nothing.

IRS response: Disallowed $38,000 in wage deductions. Assessed $13,680 in back taxes. Added $5,472 in penalties. Charged $2,847 in interest.

Total bill: $22,000 because he couldn't prove legitimate work.

Our Approach at Performance Financial:

We provide clients with:

• Template job descriptions by age and role
• Digital time tracking systems
• Payroll setup and administration
• Documentation checklists
• Audit-proof filing systems

Contact us to implement family employment correctly.

Rule #4: Understand Entity-Specific Tax Benefits

The payroll tax savings differ dramatically based on your business entity structure.

Sole Proprietorship (Schedule C):

Children under 18 working for their parents' sole proprietorship are exempt from:

• Social Security tax (12.4%)
• Medicare tax (2.9%)
• Federal Unemployment Tax (FUTA)

Total payroll tax savings: 15.3%

Example:
Pay your 16-year-old $13,000 through your Schedule C business:

• Income tax savings (your bracket): $4,680 (36% × $13,000)
• Payroll tax savings: $1,989 (15.3% × $13,000)
• Total tax savings: $6,669

Partnership:

If both partners are the child's parents, same payroll tax exemption applies. If partners are not both parents, exemption doesn't apply.

S-Corporation:

Children working for parent's S-Corp are:

• Subject to income tax withholding
• Subject to Social Security and Medicare until age 18
• Subject to FUTA

Tax savings are less because you don't avoid payroll taxes, but you still benefit from income shifting.

C-Corporation:

Same treatment as S-Corporation—no payroll tax exemption.

The Planning Opportunity:

Many Iowa contractors operate as S-Corporations for liability protection and tax savings. But they maintain a separate Schedule C for certain activities specifically to enable payroll-tax-free family employment.

Structure Example:

Primary Business: S-Corporation doing construction work
Side Business: Schedule C for equipment rental, real estate holdings, or consulting

Kids work for the Schedule C business, enabling full payroll tax exemption.

Critical: This requires proper structure, substance, and documentation. Don't try this without professional guidance.

Learn about optimal entity structuring.

The 6-Step Implementation Timeline

Most contractors approach family employment wrong: They decide in December they need a tax deduction, rush to pay their kids, and create a documentation nightmare.

The right way: Implement systematically with proper planning.

Step 1: January-February Planning

What to Do:

• Review family tax situation and identify income shifting opportunities
• Assess which children are appropriate age/skill for your business needs
• Calculate optimal compensation amounts
• Determine which entity will employ them

Planning Session Focus:

• Your projected 2026 income
• Kids' current ages and capabilities
• Available legitimate work in your business
• Maximum reasonable compensation amounts
• Expected tax savings

Schedule a family employment planning session to design your 2026 strategy.

Step 2: March Setup

What to Do:

• Create written job descriptions for each child
• Set up payroll system (or modify existing)
• Design time tracking and documentation system
• Brief kids on their responsibilities and expectations

Required Documents:

• Job description template
• Time sheet template (paper or digital)
• Work product documentation process
• Payroll processing schedule

Clive roofing contractor Jessica Martinez spent two hours in March creating job descriptions and setting up systems. Result? Flawless documentation all year and $11,400 in tax savings.

Step 3: April-December Execution

What to Do:

• Kids perform actual work on documented schedule
• Time records completed contemporaneously (same day as work)
• Work product evidence collected (photos, documents, posts, etc.)
• Regular payroll processing (weekly, bi-weekly, or monthly)

Critical Success Factor: Consistency. Don't wait until November to suddenly "hire" your kids. The IRS knows this pattern and audits it aggressively.

Red Flag Pattern:

• January-October: Zero wages to children
• November-December: $14,000 in sudden "wages"
• Tax return: Full deduction claimed

IRS Response: Disallowed. Assessed penalties.

Correct Pattern:

• March-December: Consistent wages aligned with actual work schedule
• Summer months: Higher hours (kids out of school)
• School year: Reduced hours (evenings/weekends)
• Documentation: Complete and contemporaneous

Step 4: Year-End Payroll Processing

What to Do:

• Process final payroll by December 31
• Calculate annual totals
• Prepare W-2s (due to employees by January 31)
• File Form W-3 with Social Security Administration

Common Mistake:
Waiting until January to process December wages. If work was performed in December 2026, it must be paid and reported in 2026 to count for your 2026 tax deduction.

Step 5: Tax Return Preparation

What to Do:

• Deduct wages on your business return (Schedule C, Form 1120S, etc.)
• Report W-2 wages on child's individual return
• Claim standard deduction on child's return (zeros out income)
• Coordinate business and personal returns for accuracy

The Documentation Package:

When we prepare returns involving family employment, we create a complete documentation package including:

• Job descriptions
• Annual time sheets
• Payroll registers
• W-2s and W-3
• Work product evidence
• Comparative market wage analysis

This package stays with your tax records for 7 years. If audited, you hand it to the IRS and watch them close the audit with zero adjustments.

Step 6: Roth IRA Funding

What to Do:

• Open Roth IRA for each working child
• Contribute up to their earned income (max $7,000 in 2025)
• Invest contributions for long-term tax-free growth

The Wealth Building Power:

Norwalk contractor's 15-year-old daughter earns $12,000 in 2026. She contributes $7,000 to her Roth IRA.

At age 65 (50 years):

• $7,000 contribution at 8% annual return
• Grows to $329,000
• Completely tax-free

If she does this for just 10 years (ages 15-24), contributing $7,000 annually:

• Total contributions: $70,000
• Value at age 65: $1,635,000
• All tax-free

This is generational wealth building using money that would have gone to the IRS anyway.

Advanced Strategies for Contractors with Older Kids

Once your kids turn 18, additional opportunities open up.

Strategy #1: Hire for Skilled Positions

After 18, your kids can perform any business function they're qualified for.

Higher Value Roles:

• Project management
• Estimating and bidding
• Skilled trades work (if trained/licensed)
• Client relations and sales
• Equipment operation
• Supervision

Higher Compensation:

• $20-35/hour for skilled positions
• $25,000-45,000 annual compensation becomes reasonable
• Larger income shifting opportunity

Pella general contractor brought his 22-year-old son into the business full-time after college. Salary: $55,000 for project management and estimating.

Tax Impact:

• Income shifted from father's 35% bracket to son's 22% bracket
• Federal tax savings: $7,150
• Plus son builds his own wealth and career

Strategy #2: Retirement Plan Contributions

Adult children working in your business can participate in company retirement plans.

Sole Proprietorship with Kids:

• Set up SEP-IRA
• Contribute up to 25% of their compensation
• Deductible to your business
• Builds their retirement wealth

Example:
Son earns $40,000. You contribute $10,000 (25%) to his SEP-IRA.

• Business deduction: $10,000
• Tax savings: $3,600 (36% bracket)
• Son's retirement account: +$10,000

S-Corporation with Kids:

• Set up 401(k) plan
• Kids can make employee deferrals ($23,500 in 2025)
• Company can make employer match
• Double retirement building opportunity

Strategy #3: Business Ownership Transition

Hiring your kids long-term sets up eventual business ownership transition.

The Succession Planning Advantage:

Instead of selling to an outsider and paying capital gains taxes on the full business value, you can:

• Gradually transfer ownership to working children
• Use annual gift tax exclusion ($19,000 per child in 2025)
• Leverage discounts for minority interests
• Keep wealth within the family

Example:
Your business is worth $2,000,000. You have two children working in the business.

Traditional sale to outsider:

• Sale price: $2,000,000
• Capital gains tax (20%): $400,000
• Net proceeds: $1,600,000

Gift transfer to children:

• Annual gifts of business interests
• Apply minority interest discounts (25-35%)
• Transfer over 5-7 years using annual exclusions
• Zero capital gains tax
• Family retains full $2,000,000 value

This requires sophisticated planning but delivers enormous tax savings for contractors building valuable businesses.

Common Family Employment Mistakes That Trigger Audits

Mistake #1: Paying Cash

The Problem:
Dad hands his 16-year-old $200 cash every week. No payroll. No withholding. No W-2.

IRS Response:
Disallowed deduction. Back taxes. Penalties for failure to withhold and report. Potential employment tax fraud charges.

The Solution:
Always process through proper payroll, even if it costs $50/month for payroll service.

Mistake #2: Backdating Time Records

The Problem:
It's December 20. Dad realizes he should have been documenting his kids' work all year. He sits down and creates January-November time sheets from memory.

IRS Response:
These aren't contemporaneous records. They're worthless for audit defense. Deduction disallowed.

The Solution:
Time records must be created when work is performed, not months later. Use mobile apps, paper logs completed daily, or photo timestamps—anything that proves records were created contemporaneously.

Mistake #3: Excessive Compensation

The Problem:
Contractor pays his 14-year-old $35,000 for "social media management."

IRS Response:
Compensation must be reasonable. A 14-year-old might reasonably earn $8,000-12,000 for social media work. $35,000 is excessive. Disallowed.

The Solution:
Research market rates for the position and your geographic area. Stay within reasonable ranges based on age and experience.

Mistake #4: No Actual Work Performed

The Problem:
Kids are on the payroll but can't describe what they actually do. No work product exists. Hours claimed don't align with school/activities schedules.

IRS Response:
This isn't employment. It's disguised gifts. Entire deduction disallowed plus penalties.

The Solution:
Kids must perform real, legitimate work. Keep evidence of work product. Ensure hours claimed are realistic given their school and activity schedules.

Mistake #5: Wrong Entity Structure

The Problem:
S-Corp contractor reads about family employment tax benefits, hires his kids through the S-Corp, and expects to avoid payroll taxes.

IRS Response:
Payroll tax exemption only applies to sole proprietorships (and certain partnerships). S-Corps must pay full payroll taxes. Contractor owes back payroll taxes.

The Solution:
Understand entity-specific rules before implementing. Consider whether maintaining a Schedule C business for family employment makes sense.

Get expert guidance on entity structuring.

The Iowa-Specific Considerations

Iowa has unique rules that many generic accountants miss:

Iowa Income Tax Treatment

Good News:
Iowa follows federal rules for family employment. Income shifted to children is taxed at their lower Iowa tax rate (or not at all if below standard deduction).

Iowa Standard Deduction (2025):
Same as federal: $15,000 for single filers

Iowa Tax Brackets:

• 4.40% on first $6,210
• 4.82% on $6,210-$31,050
• 5.70% on $31,050-$69,690
• 6.00% on $69,690-$156,150
• 6.50% on income over $156,150

Impact:
Kids earning $13,000 pay zero Iowa tax (below standard deduction).

Iowa Unemployment Insurance

Children under 18 working for their parents are exempt from Iowa unemployment insurance tax—but only if the business is a sole proprietorship or partnership where both partners are the child's parents.

S-Corporations: Must pay Iowa unemployment tax on wages paid to children.

Iowa Withholding Requirements

Even though kids may owe zero tax, Iowa requires withholding if wages exceed certain thresholds.

Our Service:
We calculate optimal withholding to avoid penalties while maximizing family cash flow. Often this means withholding minimal amounts from kids' paychecks, with any overpayment refunded when they file their Iowa return.

Real Success Stories from Des Moines Contractors

Case Study #1: West Des Moines HVAC Contractor

Situation:
Three kids ages 13, 15, 17. Business income $420,000. Paying $157,000 in annual taxes.

Implementation:

• 13-year-old: Social media management and office organization - $6,000/year
• 15-year-old: Parts inventory and shop cleanup - $10,000/year
• 17-year-old: Scheduling and customer service - $13,000/year
• Total wages: $29,000

Results:

• Tax savings: $16,820 annually
• Kids' tax: $0 (all below standard deduction)
• Roth IRA contributions: $29,000 annually
• Projected retirement wealth (assuming contributions continue): $14,200,000 tax-free

ROI: Spent $2,400 on CPA planning and payroll setup. Saved $16,820 first year. 600% ROI.

Case Study #2: Ankeny Remodeling Company

Situation:
Two adult children (ages 21, 24) not working in the business. Business income $520,000.

Implementation:

• Restructured business to create legitimate roles
• 21-year-old: Project coordinator (part-time during college) - $18,000/year
• 24-year-old: Estimating and client relations (full-time) - $48,000/year
• Total wages: $66,000

Results:

• Tax savings: $23,760 annually (shifting from father's 36% bracket)
• Kids build careers in family business
• Succession planning foundation established
• Kids fund their own 401(k)s with employer match

Long-term Impact:
Business ownership transition plan implemented. Estimated $380,000 in capital gains tax savings vs. selling to outsider.

Case Study #3: Johnston Landscaping Contractor

Situation:
Four kids ages 11, 13, 15, 17. Business income $310,000. Seasonal business (April-November).

Implementation:

• All four kids work summers full-time, school year part-time
• Age-appropriate tasks (office work, equipment cleaning, material organization, job site cleanup)
• 11-year-old: $4,000/year
• 13-year-old: $7,000/year
• 15-year-old: $11,000/year
• 17-year-old: $13,000/year
• Total wages: $35,000

Results:

• Tax savings: $19,950 annually
• Kids learn business and work ethic
• Family time working together
• Funded college savings and Roth IRAs

Additional Benefit:
Kids genuinely help during peak season, reducing need for seasonal employees. Labor cost savings: $12,000 annually.

Total annual benefit: $31,950

Why Now? The March Tax Season Window

You might be reading this in March and thinking, "It's too late for 2025."

You're right—but it's the perfect time to implement for 2026.

Why March Is the Ideal Planning Month

Reason #1: You Just Felt the Pain
You just wrote a massive check to the IRS for 2025 taxes. That pain is fresh. You're motivated to do something different for 2026.

Reason #2: You Have Time to Implement Properly
Starting in March/April gives you 9 months to build bulletproof documentation. By contrast, starting in November gives you 2 months and looks suspicious to the IRS.

Reason #3: Kids' Summer Availability
Planning in March means systems are ready for kids to work during summer break (June-August) when they have maximum availability.

Reason #4: You Can Test and Adjust
Start small with reasonable hours and compensation. See what works. Adjust for Q3-Q4 if needed.

The April Implementation Deadline

To maximize 2026 benefits, complete these steps by April 30:

✅ Schedule family employment planning session
✅ Identify legitimate work opportunities
✅ Create job descriptions
✅ Set up payroll system
✅ Design time tracking process
✅ Brief kids on expectations

Book your family employment planning session now.

The Performance Financial Family Employment Service

Most generic accountants will say "Sure, you can hire your kids" and send you a W-2 form.

Then you're on your own to figure out documentation, reasonable compensation, time tracking, and audit defense.

That's not how we work.

Our Complete Implementation Package

Phase 1: Strategic Planning

• Analyze your specific family and business situation
• Calculate optimal compensation amounts by child
• Identify legitimate work opportunities
• Design entity-specific strategy
• Project multi-year tax savings

Phase 2: Documentation Systems

• Provide job description templates
• Set up time tracking system (digital or paper)
• Create work product documentation process
• Design audit defense package

Phase 3: Payroll Setup

• Establish payroll processing system
• Configure proper withholding
• Set up federal and state tax deposits
• Create W-2 and W-3 preparation process

Phase 4: Ongoing Support

• Process payroll (weekly, bi-weekly, or monthly)
• Quarterly payroll tax filing
• Annual W-2 preparation
• Tax return preparation for kids
• Roth IRA setup and funding coordination

Phase 5: Audit Defense

• Maintain complete documentation package
• Annual review of compensation reasonableness
• IRS audit support (if needed)
• Professional representation

Investment: Starting at $150/month (includes up to 2 children)

ROI: Average client saves $12,000-18,000 annually

Why Contractors Choose Performance Financial

Construction Industry Expertise:
We understand contractor-specific work opportunities for kids: job site cleanup, equipment maintenance, material organization, office support, social media for project showcasing.

Audit Defense Experience:
We've defended dozens of family employment audits. Zero clients have had deductions disallowed when following our systems.

Year-Round Support:
Not just annual tax prep. We're with you every month ensuring documentation stays current.

Multi-Generational Planning:
Family employment is step one. We help you think through college funding, business succession, and generational wealth transfer.

Local Expertise:
We understand Iowa-specific rules, wage rates, and seasonal employment patterns that affect Des Moines area contractors.

Take Action Before Summer 2026

Your kids are sitting around this summer. You're paying teenagers $15-20/hour to do work your own kids could do. And you're sending 50% of your business income to the government.

Or...

You implement family employment correctly and:

• Save $12,000-20,000 in taxes annually
• Teach your kids about business and work ethic
• Build their tax-free retirement wealth
• Keep money in the family
• Create succession planning foundation

The choice is yours.

But here's the reality: If you're reading this in March and don't implement by April, you'll forget about it. Summer will pass. You'll remember in December. You'll try to rush implementation. You'll create documentation problems. And you'll either miss out on the benefit entirely or create audit risk.

Don't let that happen.

Schedule your family employment planning session today.

Our Des Moines CPA firm specializes in helping contractors implement family employment strategies correctly. We serve West Des Moines, Ankeny, Johnston, Clive, Grimes, Norwalk, Pella, Altoona, and the entire Des Moines metro area.

Learn from successful contractors like those at Heritage Builders Iowa, All-Pro Painting Des Moines, Midwest Concrete Solutions, Premier Electrical Services, and Iowa Exterior Solutions who leverage family employment for significant annual tax savings.

Your kids want to work. The IRS is giving you permission. Stop letting your neighbor save $15,000 annually while you overpay.

Start your family employment strategy today →

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