Hiring Your Kids in Your Real Estate Business

Hiring your kids in real estate is one of the most talked-about strategies on social media. Everyone asks and wants to know ‘How can we do it’?

Here’s a Real-Life Example

Year-end call with a client last December. He runs three short-term rentals through an LLC he and his wife own 50/50. His thirteen-year-old daughter handles all the guest messaging on weekends.

She turns on the messages app while she eats cereal. He pays her nothing. “She’s just helping.”

I asked him if he could find logs, anything other than messages that booked her total time.

We wound up running payroll of $6,000 to his daughter as a W-2 wage in 2025. Deductible by the LLC at 37%. Zero federal income tax to her on the receiving end. No FICA. No FUTA. Roth-eligible.

He had been handing the IRS roughly $4,400 of that every year for three years. The work was getting done. The deduction was sitting on the table.

This is one of the cleanest moves in the code for real estate owners with kids old enough to do real work. It is also one of the most over-promised and under-documented strategies on the internet.

Most of the “pay your kids $14K” content out there is missing the real-estate-specific landmine, and it’s the one that decides whether the strategy works at all.

What You’re Actually Getting

Three layers of benefit stack on every dollar of wage:

1. Deduction at your marginal rate. Wages paid to your child for legitimate work in your business are an ordinary and necessary business expense under §162. If you’re a high-income real estate investor at 37% federal, every $1,000 you push to your child is $370 you don’t owe the IRS.
2. Standard deduction at the child’s rate. For 2026, the standard deduction for a single filer is $15,750 (TCJA permanent, indexed). A dependent’s standard deduction is the greater of $1,350 or earned income + $450, capped at that $15,750. Up to $15,750 of wages = $0 federal income tax to the kid. The kiddie tax under §1(g) does not apply to earned income — only unearned income above the kiddie-tax threshold. Wages skate past it entirely.
3. Earned income unlocks a Roth IRA. A child with earned income can contribute to a Roth under §408A up to the annual limit ($7,000 for 2025) or 100% of earned income, whichever is lower. Qualified distributions in retirement are excluded from gross income under §408A(d)(1). Forty-plus years of compounding inside a Roth, started at age 14, is not a footnote — it’s the entire long game.

Stacked together: a deductible wage at the parent’s bracket, zero federal income tax at the child’s bracket, zero FICA, zero FUTA, and a Roth contribution that compounds for half a century. That’s the play.

Why Your Real Estate Entity Probably Blocks the FICA Savings (and How to Fix It)

Here is the piece every generic “hire your kids” article skips.

The FICA exemption for a child under 18 working for a parent lives in §3121(b)(3)(A). The FUTA exemption for a child under 21 lives in §3306(c)(5).

Both only apply when the employer is:

• A sole proprietorship owned by a parent, or
• A partnership where the only partners are the two parents

Both exemptions are gone when the employer is:

• An S corporation
• A C corporation
• An LLC that has elected corporate treatment
• A partnership with any non-parent partner (a grandparent, a child, an outside investor — anyone)

Real estate ownership structures break this constantly. A married couple holding a rental in a joint LLC defaulting to partnership treatment — fine, exemption applies.

A single-member LLC owned by one parent — disregarded, exemption applies.

The moment you elect S-corp treatment on a flip business or a property-management LLC, the exemption is gone.

Run wages to the kid out of an S-corp, and you owe both halves of FICA on every dollar. That’s a 15.3% drag on what was supposed to be a clean deduction.

The Age Question: What the Tax Court Actually Said

The folklore is “kids over seven.” The folklore is loosely correct, but the underlying authority matters when an examiner asks for it.

Eller v. Commissioner, 77 T.C. 934 (1981) is the case everyone is pointing at without realizing it. The Ellers paid their three children (ages 7, 11, and 12) for cleaning, errands, and groundskeeping at the mobile home park they owned. The IRS challenged.

The Tax Court allowed the wages because the kids did real work, the work would otherwise have been paid to a third party, and the parents kept time logs.

Denman v. Commissioner, 48 T.C. 439 (1967) is the case nobody cites. The Denmans paid their seven-year-old. The Court tossed the deduction. Seven was too young to do meaningful work, and the documentation did not support what they claimed.

Working rule, not a bright line: age nine or older is defensible if the work is real and the documentation is contemporaneous. Below that, the paper trail has to be impeccable. The IRS reads age inversely to documentation. The younger the kid, the more the file has to look like an actual employer-employee relationship.

Reasonable Compensation: the Test that Breaks Most Plans

Wages have to be reasonable for the work performed and for someone of the child’s age and skill. The test is what you would have paid an unrelated third party to do the same task. Not what you wish you could deduct. Not what would round neatly to the standard deduction.

A 14-year-old running social media for your STR portfolio at $20–25/hour is maybe plausible (still pushing it a little bit). A 9-year-old at $50/hour to “consult on marketing strategy” is not. A 6-year-old at any rate doing “modeling” for property photos is a deduction the Tax Court has previously denied and will deny again.

In most cases, the minimum wage will need to be paid. Manual labor, menial tasks, etc. If someone else were to hire your kids, what would they pay?

And I know you love your kids, but is that amount truly realistic?

The Math

Married filing jointly. Top federal bracket (37%). Three short-term rentals held in a husband-wife LLC defaulting to partnership treatment. Two kids: a 14-year-old and an 11-year-old.

• 14-year-old. Guest messaging, calendar management, listing photo refreshes, and supply ordering. Four hours a week, 50 weeks, $20/hour. Total wages: $4,000.
• 11-year-old. Cleaning support between turnovers, sign placement, and simple photo touch-ups. Three hours a week, 40 weeks, $15/hour. Total wages: $1,800.
• Combined annual wages paid: $9,800.
• Parent-side tax effect at 37% federal + 5% state: $9,800 × 42% = $4,116 in tax saved.
• Kid-side federal income tax: each child is well below the $15,750 standard deduction. $0 owed.
• FICA owed (husband-wife partnership qualifies under §3121(b)(3)(A)): $0. FUTA owed under §3306(c)(5): $0.
• Roth IRA contribution for the 14-year-old: she can fund $7,000 of the $8,000 wage into a custodial Roth. Assume an 8% real return and 50 years of compounding. One year of $7,000 becomes roughly $328,000 at her age of 64. Run the play for five years, and her Roth alone clears seven figures before she’s old enough to retire.
• Net 2026 cost to the family unit: roughly negative $4,100. The parents save more in taxes than the children owe in taxes, because the children owe zero. That asymmetry only exists because the IRS still respects the taxpayer-by-taxpayer separation, and because the family unit is one economic actor when it comes to who keeps the cash.

Where People Blow It

The defense-layer version of this post. Document each of these, because the IRS tests each of them on audit:

• No written job description. What does the child actually do? Put it on paper before the first paycheck.
• No time records. A simple weekly log: dates, hours, tasks. Handwritten is fine. None at all is fatal.
• Wages flowing to the parent’s account, not the child’s. The child needs a bank account in the child’s name. Wages land there. If you want to funnel the dollars into a Roth IRA or a UTMA afterward, that’s fine, but the wage has to hit the child’s account first. Wages going straight to the parent is a sham, and the IRS will say so.
• Job titles the IRS laughs at. “CEO.” “Director of Operations.” “Chief Marketing Officer.” None of that for a 10-year-old. The title should describe the work: office assistant, property cleaner, social media support.
• Wages disproportionate to the work. $30K to a kid who showed up twice. The IRS won’t carve a deduction for hours that weren’t worked, and the Tax Court has been consistent on this for decades.
• Treating a Schedule E rental as a trade or business without facts to back it. If your rental activity does not rise to a §162 trade or business, the wage characterization shifts (typically a §212 production-of-income expense, or an operating expense on Schedule E). It usually doesn’t kill the strategy, but it changes which line the deduction sits on. Talk to your CPA about the reporting before payroll runs.

Planning Moves: What to Actually Do

Tight list. None of this is theoretical. Each step is what a defensible file looks like before the first wage runs.

1. Audit the entity structure first. Before you cut a paycheck, know whether the operating entity qualifies for §3121(b)(3).
2. Write the job description. One page. Tasks, hours, hourly rate, reporting structure. Date it. File it.
3. Open a bank account in the child’s name. The W-2 name has to match the bank statement name.
4. Run a real W-2. Real payroll provider, W-4 from the child, state new-hire reporting if applicable (maybe even state unemployment setup, but check your state requirements), W-2 in January. The cost is a rounding error.
5. Fund the custodial Roth IRA. Child is account owner, parent is custodian until age of majority. Contribution limited to the lesser of the annual cap or earned income. This is where the strategy becomes generational instead of incremental.
6. Keep contemporaneous time logs. Hand-kept is fine. Backfilled is not. If the IRS asks for them, you produce them out of the file, but not out of a spreadsheet you built that week.
7. Reset reasonableness annually. As the kid ages, the wage can grow. A 17-year-old running your bookkeeping is worth materially more than the 11-year-old who used to fold towels.

If You’ve Got Kids and a Real Estate Business

The hire-your-kids play isn’t a hack. It’s §162 plus §3121(b)(3)(A) plus §63 plus §408A working the way Congress wrote them. The code rewards documented, age-appropriate, arm’s-length employment of your children inside a business you actually own.

This is not filing-season work. It’s a Q1 conversation with your CPA: review the entity stack, set up the FMC if you need one, get the job descriptions written, open the kid’s bank account, and put the wages on the books before the first task gets done.

By the time you’re handing W-2s out in January, the planning window has closed. Either the work got done with a paper trail, or it didn’t. The deduction is yours if you went and got it.

Want to implement strategies like hiring your kids the right way? Our team helps real estate investors build and maintain proactive tax plans. Schedule a free discovery call today.