Business Owners: Employ Your Child & Build Their Wealth

What if I told you there was a strategy that allows your child to build wealth in a tax-advantaged account and benefits both your business and your child's financial future. Interested? Read on…

Step 1: Set Up an LLC for Your Child

As a business owner, you may want to explore the tax advantages of employing your children, especially when taking advantage of the 1099 income structure and, as a side benefit, introducing them to entrepreneurship. A great way to do this is by having your child set up an LLC, open a business bank account, and use income from your business to pay your child and fund their Roth IRA.

• Explain the Process to Your Child. Before diving into the technicalities, explaining to your child why starting an LLC is a smart choice is important. It will teach them business operations, taxes, and the basics of entrepreneurship. An LLC also provides liability protection and flexibility in taxing, making it ideal for young entrepreneurs.
  
  
• Register the LLC. You can easily form an LLC for your child by filing the necessary paperwork online for free with the Indiana Secretary of State’s office. This will include selecting a unique name for the LLC and following the directions to create the articles of incorporation.
  
  
• Obtain an Employer Identification Number (EIN). Your child’s LLC will also need an Employer Identification Number (EIN) from the IRS. This number functions like a Social Security Number for the business, which is essential for filing taxes, opening a business bank account, and conducting business transactions.
  
  

Step 2: Open a Business Bank Account

• Set Up the Account. After the LLC is formed and the EIN is obtained, the next step is to open a business checking account in the LLC’s name. This account will be used for all business-related transactions. The bank will require the EIN, articles of incorporation, and identification documents to open the account.
  
  
• Process Transactions through the Business Account. All of your child’s earnings from your business should be paid directly into your child’s LLC bank account. For example, if your business needs administrative help, marketing, or other services that your child can legitimately provide, you can pay s/he through their LLC. Be sure to keep business transactions separate from personal ones for tax and recordkeeping purposes. Also, be sure to document the service or activity provided by your child to the company. Example: Paying your child a marketing fee for using their picture on your business website.
  
  

Step 3: Pay Your Child’s LLC

• Issue a 1099-NEC Form. Since your child’s LLC is a separate entity, you will need to issue a 1099-NEC form to report any income your business has paid to the LLC. This helps establish your child’s business income for tax purposes. (NEC = Non-Employee Compensation)
  
  
• Tax Implications. Income earned through the LLC will be reported by the LLC on its tax return. In 2025, the LLC standard deduction is $15,000. If you pay your child $15,000 or less, s/he will not owe any taxes on the money earned. However, we recommend consulting with a licensed tax professional.
  
  
• Business Tax Deductions. Your business can deduct the amount paid to your child’s LLC as a business expense, reducing your overall taxable income. This makes the arrangement mutually beneficial: your business gets a tax deduction and your child earns income.
  
  

Step 4: Fund a Roth IRA for Your Child

• Open a Roth IRA. Once your child starts earning income through their LLC, s/he can open a Roth IRA, which is a retirement account that allows contributions to grow tax-free. If the child is under the age of 18, you will set up a Custodial Roth IRA, which will be titled under your name for the benefit of your child. At age 21, it turns into a regular Roth IRA under your child’s control.
  
  
• Contribute to the Roth IRA. Contributions to a Roth IRA can be made up to the annual limit set by the IRS, which is $7,000 in 2025 for individuals under age 50. Your child can use the earned income from the LLC to make a contribution to their Roth IRA.
  
  
• Long-Term Benefits. The true power of a Roth IRA lies in its tax-free growth. By starting early, your child can benefit from decades of compound interest. The earlier your child starts contributing, the more s/he will accumulate for retirement, setting your child up for financial success in the future.
  
  

Step 5: Keep Records and Monitor Progress

• Track Contributions and Taxes. As with any business, it is important to keep detailed records. This includes tracking income paid through 1099 forms, business expenses, and contributions to the Roth IRA. Good recordkeeping will simplify tax filing for both you and your child.
  
  
• Rinse and Repeat. You can implement this strategy every year. The impact of annual savings, tax-free growth, and compounding interest can create a significant nest egg for your child’s retirement.
  
  

Summary

Paying your child 1099 income through your business, having them set up an LLC, and contributing to a Roth IRA is an excellent strategy to teach financial literacy and help your child build long-term wealth. It provides immediate tax benefits for your business while offering your child a head start in saving for retirement. With proper planning and guidance, this approach can lay the foundation for a solid financial future for your child. Be sure to consult a tax advisor to ensure that everything is set up correctly and that you're optimizing the tax advantages.

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