Paying Your Children From The Rental

By Jason Watson, CPA
Posted Monday, July 7, 2025

Should you pay Johnny or Suzie to paint a wall? Or build out your social media platforms? Mow the lawn with scissors? Perhaps. While most parents can’t get their children to clean a counter or put away dishes, putting them to work on the rental properties might be a good option.

This section is long and nuanced, so buckle up for your safety. Here we go.

Tax Advantages

There are some tax benefits to paying your children- for example, you can pay your child $15,000 in wages since the standard deduction is also $15,000 (for the 2025 tax year) and they will not have any taxable income. You can still claim them as a dependent too (see below). From there, they can also gift this money back to you, save for a house down payment, or help pay for groceries.

Some kidding aside, for you to give your child $15,000 to save for college or pay for college, it requires $20,000 or more in parental income because of just your federal income taxes. Simply take $15,000 and divide it by 76% for the 24% marginal tax bracket. At 35% marginal tax bracket, it takes $23,000 in parental income to give your children $15,000 and we haven’t even considered your portion of Social Security and Medicare, nor state income taxes.

For grins, taking $15,000 and dividing by 55% which represents 45% in a truckload of taxes equals $27,300. As such, there are some real tax advantages to employing your children to work on your rental property.

There are three basic ways to compensate them for their amazing talents and impeccable work product. In descending order of elegance, you can-

• Create a property management company.
• Process payroll through an S corporation if you already have that deployed.
• Consider them a contractor, and issue a 1099-NEC.

Your children are going to take your money anyways- might as well make it tax-advantaged, right?

Sidebar: We recently came across this phrase, and thought it was lovely- Either you fly first class, or your children will.

Getting Money Out Of The Rentals

As mentioned in our sections on retirement planning in a later chapter, net rental income (profits) is not subject to Social Security and Medicare taxes unless you are operating a hotel or providing substantial personal services. This might not seem like a big deal, but when we consider payroll taxes later, you might be creating additional taxes unnecessarily (keep reading).

The next hurdle is how to get the money out of the rental property itself. What can be done? Two options in reference to paying your children to work on the rental properties-

• Create a property management company, or
• Pay them directly from the rental property checking account, either processing payroll or paying them as a contractor (both of these options have problems as we will discuss).

The next hurdle is that your child or children must be doing actual work at a compensation rate that is reasonable. $100 an hour to pick up pine needles might be excessive.

Create A Property Management Company

This is the most elegant option since you can a) scale this arrangement across multiple rental properties, and b) use the same arrangement to fund additional retirement accounts for you and your children such as a 401k plan.

How does this work? You would charge your rental properties a management fee that is usual and customary. 5-10% for long-term rentals, and perhaps 20-40% for short-term rentals. This is paid like any other management fee where money is paid from the rental property checking account to your management company checking account.

Sidebar: You can be a rockstar, and act like a real property manager and collect the rents directly, take your commission or fee, and transfer the remainder to the rental property checking account to pay remaining bills such as mortgage loan payments, property taxes, and typical expenses.

The management company could also provide direct chargeable services such as advertising, picking up pine needles, licking stamps and other cleaning and maintenance services. From there, payroll accounts are set up and payroll is processed with paystubs, W-2s, etc. Yeah, real payroll. One children, a gaggle of children. One employee, or a SWAT team. Proper payroll processing is the same.

For single-member limited liability companies (LLCs) or sole proprietors, if your child is under the age of 18, the business does not have to pay typical employment taxes such as Social Security and Medicare. You can also avoid unemployment taxes until the child turns 21. But for S Corps and C Corps, Social Security and Medicare taxes are paid regardless of age (we discuss this again later).

This is akin to the family management LLC concept that we discuss in our tax reduction strategies article. You can read it here-

wcginc.com/6177

Property Management Problems

However, the property management option quickly creates two potential problems-

• Depending on your state and regulated industry rules, you might have to register your management company. This might be extreme, right? You could also consider the payments from the rental properties to your basic LLC as consulting fees, cleaning services or contract maintenance and repair expenses, and not property management as a workaround.
• You might easily run into a situation where your property management fee or services fee creates a rental loss. However, that loss might be limited based on passive activity loss limits (see our section on page 104). Sure, you can reduce this with the wage expenses from paying your children and Yes, your passive activity losses will eventually offset future rental profits or release upon sale, but be aware of the corner you might be painting yourself into. And if Johnny or Suzie is being paid to paint, then this becomes a bit ironic.

Payroll Processing Problems

There are four problems with processing payroll-

• The cost of processing payroll can be $800 to $1,200 annually depending on the payroll processor such as Gusto, ADP, Paychex, Intuit, etc. This might go away if you already process payroll through an existing business (we talk about S corporations in a bit).
• If your child or children are 18 years or older, Social Security and Medicare taxes must be paid at 15.3% of the wages paid.
• Payroll is another headache to add to your already long list of headaches. The IRS is fairly chill, but states can be a big pain in the butt. Texas, piece of cake. Ohio? Complete nightmare with local cities and school district taxes. Check out your own paystub and see what nutty taxes are being withheld by your employer- that is a decent barometer of what you’ll need to handle for paying your children to dust the end tables and replace lightbulbs.
• Where do you put the payroll processing system? If you don’t do the property management, family management LLC or contractor / consulting idea above, then you typically will process payroll from the rental property itself. This doesn’t scale since payroll accounts are tied to an Employer Identification Number (EIN). One rental, one LLC, one EIN. Sure, one rental property could lend your child to another rental property (employee leasing) but that is unnecessarily messy. Alternatively, one LLC can own several rental properties but most real estate investors like compartmentalization if they can.

Tax Savings Of Employing Your Children

The juice must be worth the squeeze, right? The tax arbitrage is real as we discussed above, but the math comes from the difference between the parent’s tax rate and the “costs” of processing payroll including payroll taxes such as Social Security and Medicare.

One child earning $7,000 might not be worth the effort whereas $15,000, which is the standard deduction for the 2025 tax year, might be. Consider the following table-

	<18 Years Old	18+ Years Old
Wages	15,000	15,000
Payroll Taxes	0	2,295
Payroll Fees	800	800
Total “Costs”	800	3,095
Mom & Dad’s Savings @24%	3,600	3,600
Net Savings	2,800	505
Mom & Dad’s Savings @35%	5,250	5,250
Net Savings	4,450	2,155

As you can see, employing your 19-year-old college student when you are in the 24% marginal tax bracket, might not be worth the effort. The $505 bolded above might not push your needle or blow your hair back. Two kids, ages 15 and 17, might make the effort worthwhile especially if you are in the 24% marginal tax bracket or higher.

There are also some parental pleasures beyond the dollars and cents such as having your children contribute to a Roth IRA at an early age. Imagine your 15-year-old contributing $7,000 annually to a Roth IRA. When they are 25 years old, they would have $70,000 in contribution basis to be used for a home purchase. Or they could let it ride for another 40 years and have a healthy nest egg towards retirement.

The Equal And Opposite Reaction

There are several things at play when considering employing your children with your rental properties. First, and as mentioned earlier, your children must actually work, and this is the biggest bone of contention with the IRS. Consider that a $30 an hour job would need 500 hours or about 10 per week to achieve $15,000 in wages. So, get that squared away and be reasonable.

Also, the pay must be consistent, and the pay must be usual and customary to what you pay others for similar work. Basically, you need to treat them like any other employee or service provider to avoid trouble. Lastly, you need to keep detailed records such as timecards and job descriptions (of course you do!). This must be perceived as an arms-length relationship.

Another issue to consider is support and claiming them as a dependent. If your child is going to college and you are paying them to work at the family business or on the rental property, for you to claim them as a dependent you must provide over half of the their support. This includes the amounts spent to provide food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities.

This creates an interesting conundrum. If your child earns $30,000 working for the parents, but socks all the money away into savings while you continue to pay over half of the support such as rent, food and education, you can still claim them as a dependent. Nice, right?

Many states also have labor laws that dictate the age your child can work, even if employed by the parents. For example, Indiana allows a 14-year-old to work with a permit. Minors under 14 may work as newspaper carrier, golf caddy, domestic service worker in a private residence (sounds like chores) or farm laborer. Minors under 12 in Indiana can only be farm laborers. Again, in Indiana, there is no need for a work permit if the work is outside school hours of 7:30AM to 3:30PM. We bring these examples to light so you understand and check your state or local laws about hiring your kids.

WCG CPAs & Advisors will not process payroll for any child under the age of 12 unless there are special circumstances. For example, we have a client who has twin 9-year-old daughters who do quite well recording Tik Tok videos. We continue to be amazed at how people make money, and what the public is willing to pay for the efforts. But we digress.

Education Credits

You can also create some tax due to take advantage of the American Opportunity Tax Credit (AOTC). Huh? You, the parents, make too much money and cannot take advantage of the AOTC education credit. But Johnny or Suzie, with a little bit of tax due on their 1040 tax return from a $30,000 salary (for example), can get all the tax back as a credit plus the refundable portion.

There are some things to navigate through such as claiming them as a dependent, the work needed for a $30,000 salary, etc. but it is something to consider.

Add Your Children To Your S Corporation

Do you already have a business taxed as an S Corp and process shareholder payroll? Perhaps you have employees too. You might be able to create a business need for your rental properties to pay a consulting fee or pay for other services to your S corporation, and then process payroll for your children.

However, there are some pitfalls. If you are paying them through an S Corp, you must also pay Social Security and Medicare taxes at 15.3% regardless of age. Therefore, your marginal tax rate needs to be 22% or higher for this to make sense (see table above). How much sense? 6% difference in taxes multiplied against $15,000 is $900.

Considering Your Children Independent Contractors

Calling your children independent contractors, paying them directly and issuing an eventual 1099-NEC is problematic on two fronts-

First, to truly be a contractor they must generally hold themselves out to the public as someone in that line of work, trade or profession. Here is the verbiage from Colorado, WCG CPAs & Advisors’ home state-

service performed by an individual for another shall be deemed to be employment, irrespective of whether the common-law relationship of master and servant exists, unless and until it is shown to the satisfaction of the division that such individual is free from control and direction in the performance of the service, both under his contract for the performance of service and in fact; and such individual is customarily engaged in an independent trade, occupation, profession, or business related to the service performed.

What Colorado is basically stating is that all services performed are presumptively deemed employment (i.e, as an employee, and not as a contractor) unless you prove otherwise. Many states are similar.

Let’s say you can prove that your children hold themselves out to the public as lawn mowers by mowing other lawns besides the rental properties. Good! However, as independent contractors being paid as a 1099-NEC, they will pay self-employment taxes of 15.3% (which is essentially Social Security and Medicare taxes). 12 years old. 22 years old. It doesn’t matter.

The silver lining of being an independent contractor is the ability to deduct business-related expenses on Schedule C of the 1040 tax return (or business entity tax return such as a partnership or S corporation). As you are painfully aware, a W-2 employee cannot deduct mileage and other expenses against their W-2 income since 2017.

Mom And Dad (your parents)

The concepts above could also be applied to supporting your parents. There could be some scenarios where paying them a salary makes sense as well. Other sources of income and tax brackets all need to be considered, of course.

Summary of Paying Your Children From The Rental

We covered a lot in this section, and as you can see there are a ton of considerations. To repeat ourselves, there are three basic ways to compensate them for their amazing cleaning, painting and social media talents. In descending order of elegance, you can-

• Create a property management company. As mentioned, however, this can create some new problems with state registrations and licensing unless you call it something else, and only provide services such as cleaning and maintenance.
• Process payroll through an S corporation if you already have that deployed. The concerns here are creating a business connection between your rental properties and your S Corp, and the additional payroll taxes for Social Security and Medicare.
• Consider them an independent contractor and issue a 1099-NEC. We just discussed the problems with this scenario.

As you can see, employing your children to help with the rental properties and real estate investments can be a financially smart move but it takes some effort and invites some risk.