Kassidy Wagner

A Montana Tax Strategy That Can Benefit the Whole Family

For many Montana farm families and small business owners, children naturally become part of the operation long before they're old enough to drive. Whether they're feeding livestock, helping in the shop, running parts, or assisting in the office, those hours can do more than teach responsibility; they may also create valuable tax savings for your family.

However, as with any tax strategy, there are rules to follow.

Why Hire Your Kids?

If your child is legitimately working in your business, paying them through payroll can provide several benefits:

• Your business receives a deduction for wages paid.

• Your child may owe little or no federal income tax if their earnings are below the annual standard deduction.

• Earned income allows them to contribute to a Roth IRA, giving them decades of potential tax-free growth.

• Instead of paying an outside employee, you're investing in your own family while teaching valuable work skills.

What Kind of Work Counts?

The IRS requires your child to perform real work that is appropriate for their age.

On Montana farms and ranches, that may include:

• Feeding livestock

• Cleaning barns or equipment

• Moving irrigation pipe

• Fence repair and maintenance

• Running parts or supplies

• Recordkeeping and filing

• Cleaning the shop or office

• Updating social media or taking photos for marketing

• Organizing inventory

• General maintenance around the business

Every job should be one that you would otherwise pay someone else to perform.

Pay a Fair Wage

One of the most common mistakes is paying children more than the work is worth.

The IRS expects wages to be reasonable based on the child's age, duties, and the local market. Paying your teenager a fair hourly wage for feeding cattle or helping in the office is much easier to justify than paying excessive wages for minimal work.

Documentation Matters

Hiring your child isn't simply writing them a check.

Like every other employee, you should maintain:

• Employment paperwork

• Job descriptions

• Time sheets or records of hours worked

• Payroll records

• Copies of paychecks or direct deposits

Good records help support your deduction if the IRS ever asks questions.

Special Payroll Tax Rules

One of the biggest tax advantages depends on how your business is organized.

Suppose you operate as a sole proprietorship or a partnership where both partners are the child's parents; wages paid to a child under age 18 are generally not subject to Social Security or Medicare taxes. Wages paid before age 21 are also generally exempt from federal unemployment (FUTA) tax.

These payroll tax exemptions do not apply if your business is an S corporation or C corporation. Children employed by corporations are generally treated the same as any other employee for payroll tax purposes. Because many Montana farms and ranches have different ownership structures, it's important to review your situation before adding children to payroll.

It's About More Than Taxes

While the tax savings are attractive, many parents find the long-term benefits even more valuable.

Working in the family business helps children:

• Develop a strong work ethic

• Learn responsibility

• Understand money management

• Gain valuable job experience

• Begin saving for retirement through a Roth IRA

• Appreciate what it takes to run a business

These lessons often last far longer than the tax savings themselves.

Common Misconceptions

"I can pay my child whatever I want."
No. Compensation must be reasonable for the work performed.

"They don't actually have to work."
False. The work must be real, necessary for the business, and documented.

"Cash payments don't require payroll records."
Incorrect. Proper payroll documentation is essential regardless of how wages are paid.

Montana Tax Tip

One of the biggest long-term advantages of hiring your child is giving them earned income, which makes them eligible to contribute to a Roth IRA. For 2026, they can contribute up to the lesser of their earned income or the annual IRS contribution limit. Even a few thousand dollars invested during their teenage years can grow tax-free for decades through the power of compound interest.

The Bottom Line

For many Montana farms, ranches, and family-owned businesses, hiring your children can be one of the most effective tax planning strategies available. When handled properly, it can reduce taxable income, provide valuable work experience, and help your children begin building financial independence at an early age.

If you're considering putting your children on payroll, we'd be happy to review your business structure, explain the payroll rules, and help you set everything up correctly so you can take advantage of the available tax benefits while staying compliant.