Last updated: February 2026
Most parents give their children an allowance at some point. It's a common way to teach kids about money and reward them for helping out around the house. But if you own a business, there's a much smarter way to get money into your child's hands.
Instead of giving your child $200 a month from your personal checking account (with after-tax dollars), you can pay them $200 a month from your business for real work they perform. The money still goes to your child, but now it's a tax-deductible business expense. That one change can save your family thousands of dollars per year.
The Allowance Problem
An allowance is a gift. You earn income, pay taxes on it, and then give some of what's left to your child. There's no deduction, no tax benefit, and no financial record that helps your child build a financial foundation.
For example, if you're in the 24% federal tax bracket and you want to give your child $10,000 over the course of a year, you need to earn roughly $13,150 to have $10,000 left after federal income tax (not counting state taxes or self-employment tax). That $3,150 difference goes straight to the IRS.
The Business Wage Advantage
Now consider paying your child $10,000 in wages for legitimate work in your business. That $10,000 is deductible as a business expense, which reduces your taxable income by the full amount. At a 24% federal rate, that saves you $2,400 in income taxes.
On your child's side, $10,000 is well under the 2026 standard deduction of $16,100, so they owe zero federal income tax on the wages. See: How Much Can I Pay My Child Tax-Free in 2026?
If you're a sole proprietor or single-member LLC owner with a child under 18, you also skip FICA taxes entirely, saving another $1,530. The total family savings: roughly $3,930 compared to giving the same $10,000 as an allowance. And your child ends up with the same amount of money. Use our Tax Savings Calculator to run your specific numbers.
It Also Opens Doors an Allowance Can't
Beyond the immediate tax savings, paying your child wages creates earned income on their record. Earned income unlocks several opportunities that an allowance never will.
Roth IRA eligibility. Your child can contribute up to $7,500 (the 2026 limit) to a Roth IRA, but only if they have earned income. Allowance money doesn't count. Business wages do. A Roth IRA contribution at age 11 could grow tax-free for over 50 years. Read: Roth IRA for Kids: Rules, Limits and How to Start.
Financial literacy. When my daughter Dylan receives a paycheck for actual work she performed, the conversation about money is completely different than "here's your allowance." She understands that money comes from effort, that records matter, and that there are real systems behind how businesses operate.
Work experience. A documented employment history, even within a family business, gives your child a foundation that's hard to replicate with household chores. For what kinds of tasks qualify, read: 50+ Legitimate Tasks You Can Pay Your Kids.
But What About Chores?
Household chores are not deductible business expenses. Mowing the lawn, doing dishes, and cleaning their room are personal tasks. You can absolutely still give an allowance for those.
The strategy is about business work specifically. If your child spends three hours on Saturday organizing your business files, that's deductible. If they spend an hour cleaning the kitchen afterward, that's just parenting. Many families run both in parallel: an allowance for household responsibilities and business wages for actual business work. The two don't conflict.
Making the Switch
- Identify tasks in your business that your child can do. Even young children can handle age-appropriate work like organizing, shredding, sorting, and basic cleaning of business spaces.
- Set a reasonable hourly rate based on the work and your local market.
- Start tracking hours and tasks. Kids Payroll makes this easy, but any consistent method works.
- Pay through your business bank account. Make sure your child has a bank account set up to receive transfers.
- Continue the allowance for household chores if you want, but keep it completely separate from business wages.
The Math Over Time
If you shift $800 per month from allowance to business wages, that's $9,600 per year in deductible wages instead of $9,600 in after-tax gifts. At a combined federal and state rate of 30%, that saves your family roughly $2,880 per year.
Over six years (like we've been doing with Dylan), the cumulative tax savings add up to a significant amount. And if your child contributes some of those earnings to a Roth IRA each year, the long-term wealth building potential is even greater. For a deeper comparison of investment account options, read: Roth IRA vs UGMA for Kids.
Frequently Asked Questions
Is it legal to pay my child instead of giving an allowance?
Absolutely. Paying your child for legitimate business work is specifically supported by the tax code. The key is that the work is real and the pay is reasonable.
Can I pay my child for chores if I work from home?
Only if the chores are business-related. Cleaning your home office could arguably be a business expense, but cleaning the kitchen is not. The line can get blurry with home-based businesses, so stick to tasks that are clearly and solely related to your business operations.
At what age can I start paying my child through my business?
The IRS has accepted employment for children as young as seven. There's no formal minimum age, but the work must be genuinely appropriate for the child's age and abilities.
Do I need to stop giving an allowance if I start paying business wages?
Not at all. Many families do both. The allowance covers household expectations and personal spending money. Business wages compensate for actual work performed in the business. Just keep the two completely separate.
Disclaimer: This article is for educational purposes only and does not constitute tax or legal advice. Consult a qualified CPA or tax professional for guidance specific to your situation.