How to Pay Your Kids Through Your Business and Build Generational Wealth

What if your child could retire with millions of dollars before they even graduate college, simply because you started investing for them early?

In this episode of the Tax Smart REI Podcast, Thomas Castelli and Nate Sosa break down one of the most talked-about tax strategies among business owners and real estate investors: paying your children through your business.

But this isn’t about fake payroll or aggressive loopholes. The discussion focuses on how to implement the strategy correctly, stay compliant with IRS rules, and use the power of compounding to help your children build long-term wealth. They also discuss the newly introduced “Trump Accounts” and how these new investment accounts may create additional opportunities for families.

Why Pay Your Children Through Your Business?

The strategy starts with a simple concept: if your children legitimately work in your business, you can pay them a reasonable wage.

That creates several potential benefits:

• Your business receives a tax deduction
• Your child earns tax-free income (up to the standard deduction)
• The child can contribute to a Roth IRA
• Long-term investment growth compounds tax-free

The key advantage is starting early.

As Nate explains, even relatively small contributions made consistently during childhood can grow into massive retirement accounts later in life thanks to compounding returns.

The Roth IRA Advantage for Kids

One of the biggest benefits of this strategy is unlocking Roth IRA contributions for children.

Children normally cannot contribute to a Roth IRA unless they have earned income. By working in the family business, they now qualify.

Thomas and Nate discuss how contributions grow tax-free and how Roth IRAs offer flexibility for:

• Retirement savings
• First-time home purchases
• Qualified education expenses

They also highlight how a child who starts investing at age 8 or 10 may have decades of tax-free growth ahead of them.

According to Nate, even modest annual contributions could potentially result in a seven-figure retirement account by retirement age.

What Type of Work Can Your Kids Do?

A major theme throughout the episode is legitimacy.

The IRS expects the work to be real, documented, and reasonably compensated.

Some common examples include:

• Social media content creation
• Office organization
• Filing and scanning documents
• Cleaning rental properties
• Landscaping
• Website testing
• Video editing
• Modeling for marketing materials
• Assisting with AI tools and business software

For real estate investors, physical labor on rental properties can often be one of the easiest categories to document.

The hosts also discuss how today’s younger generations may already have valuable digital skills that businesses can use.

How Much Should You Pay Your Kids?

This is where many people get into trouble.

The hosts caution against automatically paying children the maximum standard deduction amount simply because social media says you can.

Instead, compensation must be:

• Reasonable
• Market-based
• Tied to actual hours worked
• Supported with documentation

Thomas and Nate walk through an example showing how difficult it may be for a young child to legitimately work enough hours to justify a $16,000 annual salary at minimum wage.

Their advice is clear:
Don’t get overly aggressive.

As Nate says during the episode:
“Pigs get fed. Hogs get slaughtered.”

The Best Entity Structure for This Strategy

The structure of your business matters.

To maximize the tax benefits and avoid payroll taxes like Social Security and Medicare taxes, the child generally needs to work for:

• A sole proprietorship
• A single-member LLC
• A husband-and-wife partnership

The hosts explain why S corporations typically reduce many of the benefits associated with this strategy.

They also discuss:

• W-2 requirements
• State payroll tax considerations
• Common mistakes involving 1099 compensation
• Introducing Trump Accounts

The second half of the episode focuses on “Trump Accounts,” a new savings vehicle introduced under recent legislation.

These accounts are designed to help families build wealth for children without requiring earned income.

Key highlights include:

• Up to $5,000 annual contributions
• Available for children under 18
• Government seed contributions for qualifying births
• Investments limited to diversified market funds
• Accounts convert into traditional IRAs at adulthood

Thomas and Nate discuss how families may potentially combine Trump Accounts with Roth IRAs and 529 plans for a layered wealth-building strategy.

Trump Accounts vs. 529 Plans

The hosts also compare Trump Accounts to 529 college savings plans.

529 Plans:

• Primarily intended for education expenses
• Offer potential state tax deductions
• Can now be used for broader educational purposes

Trump Accounts:

• Focus on long-term retirement investing
• Provide broader flexibility
• May serve as an additional wealth-building tool

Ultimately, the “best” option depends on your goals, your child’s future plans, and your broader financial strategy.

Final Thoughts

This episode serves as an important reminder that tax planning isn’t just about reducing taxes today. It’s also about building long-term wealth for future generations.

When structured correctly, paying your children through your business can:

• Create tax deductions
• Help fund Roth IRAs
• Teach children responsibility
• Build significant long-term wealth

Combined with new tools like Trump Accounts, families may have more opportunities than ever before to create financial advantages for their children early in life.

As always, the hosts emphasize the importance of working with a qualified tax professional to ensure everything is implemented correctly and documented properly.