Funding Kids College as a Business Expense

Funding College as a Business Expense

For business owners with children, there is a legitimate tax strategy that turns part of the cost of educating your kids into a deductible business expense. The concept is straightforward: hire your children to perform real work in your business and pay them a wage.

How It Works

When your child earns income from your business, that income is a deductible business expense for the company. For the child, the income is offset by the standard deduction, meaning they may owe little or no federal income tax on the earnings.

For 2024, the standard deduction is $14,600. This means a child can earn up to $14,600 in wages and pay zero federal income tax.

The business gets a deduction for the wages paid. The child receives income that is essentially tax-free up to the standard deduction amount. The net effect is a transfer of funds from the business to the child at a significantly lower total tax cost than if the owner took the money as personal income and then paid for the child's expenses.

FICA Considerations

For sole proprietors and single-member LLCs, wages paid to children under age 18 are exempt from Social Security and Medicare taxes (FICA). This makes the tax benefit even more powerful for businesses structured this way.

For S-Corps and other entity types, FICA applies to the child's wages regardless of age. The wages are still deductible to the business, but the payroll tax savings specific to young children of sole proprietors do not apply.

Consult with your CPA on the FICA implications for your specific business structure.

The Work Must Be Legitimate

The IRS requires that the child perform actual work, that the compensation be reasonable for the work performed, and that the arrangement be documented like any other employment relationship.

This means keeping time records, paying a reasonable hourly rate for the type of work performed, and issuing a W-2 at year-end. The work can include tasks like data entry, filing, cleaning, social media management, or other age-appropriate duties.

The key is that the work must be real, the pay must be reasonable, and the documentation must be thorough.

Building Wealth Early

Beyond the tax benefit, paying your children through the business creates an opportunity to fund a Roth IRA in their name. A child with earned income can contribute to a Roth IRA (up to their earnings or the annual limit, whichever is lower).

Money contributed to a Roth IRA at age 14 or 16 has decades to grow tax-free. Even modest contributions at a young age can compound into meaningful wealth by retirement.

This strategy combines immediate tax savings for the business with long-term wealth building for the next generation. It is one of the most efficient financial planning tools available to business owners with children.