Why Retail and CPG Owners Should Put Their Kids on Payroll
If your children help around the store, warehouse, or office, putting them on the payroll for real work is one of the most straightforward ways to cut the family's total tax bill.
Retail and CPG businesses are family businesses more often than not. The owner’s kids help restock shelves on weekends, assist with social media content, sort incoming inventory, stuff envelopes, answer phones, clean the store or office, run deliveries, or help with product photography and labeling. Most of these business owners are doing this informally and without compensation. That is a significant missed opportunity. Every dollar a child earns in legitimate wages for genuine work performed in the business is a dollar that moves from the owner’s tax return, where it may be taxed at 22%, 24%, or 32%, to the child’s tax return, where most or all of it may be taxed at zero.
Start with the payroll tax advantage, because it is the one most operators miss entirely. If your retail or CPG business is structured as a sole proprietorship or a partnership owned only by you and your spouse, wages paid to your own child under age 18 are exempt from Social Security and Medicare taxes. Under age 21, those wages are also exempt from federal unemployment tax. That is a meaningful saving that does not apply when you hire any other employee, including the neighbor’s teenager. The exemption does not apply if the business is organized as a corporation, including an S-corporation, or as a partnership that includes a partner who is not the child’s parent. For business owners in a corporate structure, the FICA exemption is unavailable, but the income tax shifting benefit described below still applies.
On the income tax side, a child with only earned income pays no federal income tax up to the standard deduction, which is $16,100 for a single filer in 2026. A teenager who spends weekends at the store tagging merchandise, restocking shelves, managing the business’s Instagram account, cleaning the office, or helping with inventory counts can earn up to $16,100 and owe nothing at the federal level, while the parent deducts every dollar against their own higher rate. The combination of a full deduction at the owner’s marginal rate and zero tax at the child’s level is a result that is difficult to replicate with any other planning strategy.
The kiddie tax does not interfere with this strategy. The kiddie tax, which pulls a child’s investment income back up to the parent’s marginal rate, applies only to unearned income, meaning dividends, interest, capital gains, and similar passive income. It does not apply to wages. Paying a child for actual work in the business keeps that income taxed at the child’s rate rather than being recaptured at the parent’s rate. This is an important distinction for business owners who have considered gifting business interests or income-producing assets to their children as an alternative: wages from real work avoid the kiddie tax entirely, while investment income from gifted assets does not.
The rules that make this strategy work are straightforward and non-negotiable. The work must be genuine and appropriate for the child’s age. The pay must be reasonable for the job performed. Time records must be maintained, checks must actually be cut and deposited in the child’s own account, and a Form W-2 must be issued at year end. A retail store owner who pays a 15-year-old $16,000 for work that a similarly aged employee would earn $10 to $12 per hour doing satisfies all of these requirements. A store owner who writes a check to a 10-year-old for work the child could not realistically perform does not. The IRS looks at whether the arrangement has economic substance, and arrangements that are clearly compensation for being a family member rather than compensation for genuine labor will not survive scrutiny.
There is one additional benefit that elevates this strategy from good to exceptional: earned income from a legitimate job qualifies a child to fund a Roth IRA. A child can contribute up to the lesser of their earned income or $7,000 to a Roth IRA in 2026. A teenager who earns $7,000 or more working in the family business can put that entire amount into a Roth IRA, where it grows completely free of income tax for decades. A $7,000 contribution made at age 16 compounded at a 7% annual return for 50 years grows to approximately $207,000 in tax-free wealth. The parent gets a current-year deduction at their marginal rate. The child gets a head start on retirement that most adults in their forties would envy. The IRS does not require that the contribution come from the specific paycheck earned; it only requires that the child have sufficient earned income during the year to justify the contribution amount.
Bottom Line: Hiring your children in the family retail or CPG business is one of the few tax strategies where every member of the family genuinely benefits. The business owner gets a real deduction at their marginal rate. The child pays little or no income tax on wages. The sole proprietor or partnership owner saves FICA on top of that. And a Roth IRA funded with the child’s earnings starts a lifetime of tax-free compounding. Keep the work real, the pay reasonable, and the paperwork clean, and this strategy is as defensible as it is valuable.