Family Payroll-to-Wealth Flywheel
Pay children for real work, then invest part of their earned income early
- Difficulty
- Moderate
- Time to result
- ~ongoing to results
- Steps
- 6
- Confidence
- 95%
The flywheel begins by employing a child for legitimate, age-appropriate work in a family business and paying a reasonable market-based wage. Dennis distinguishes paying through an S corporation from using a separate family management LLC, noting that entity choice can affect payroll taxes for children under 18. The business records the work and deducts valid compensation, while the child receives earned income subject to applicable rules. A portion can then fund a custodial Roth IRA, allowing decades of potential tax-free compounding. The final component is education: parents explain how the income was earned, why it was invested, and how assets grow. This turns a tax tactic into a repeatable mechanism for transferring both capital and financial judgment across generations.
Origin
Dennis describes adapting family-business payroll structures for children and pairing their earned income with custodial Roth IRA investing. Extracted from The Jasmine Star Show.
Core principles
- 01Children must perform legitimate age-appropriate work
- 02Compensation must be reasonable for the role
- 03Entity structure affects payroll-tax treatment
- 04Earned income can fund a custodial Roth IRA
- 05Financial knowledge should accompany transferred assets
How to run it
- 1
Identify legitimate work
Choose recurring tasks the child can genuinely perform at their age, such as modeling, basic cleanup, or helping during property visits.
Pro tip Use work that creates visible deliverables or can be photographed and logged.
Watch out A family relationship alone does not make wages deductible.
- 2
Set reasonable compensation
Determine a wage based on the role, time, age, and comparable market rates. Pay only for work actually completed.
Pro tip Write a short job description before the first payment.
Watch out Do not pay an implausibly high salary merely to maximize a deduction.
- 3
Select the employing structure
Review whether the operating company or a separate family management LLC should employ the child. Coordinate the entity and payroll treatment with qualified professionals.
Pro tip Map which management services the separate company genuinely provides.
Watch out Dennis specifically cautions that placing children directly on an S-corporation payroll can create payroll taxes.
- 4
Run and document payroll
Record hours, tasks, deliverables, wage calculations, and payments using normal business processes. Preserve evidence connecting compensation to real work.
Pro tip Use the same discipline applied to unrelated employees.
Watch out Informal cash transfers without payroll records weaken the position.
- 5
Fund the custodial Roth IRA
Contribute part of the child's eligible earned income to a custodial Roth IRA without exceeding current contribution or earned-income limits.
Pro tip Automate diversified long-term investments after obtaining appropriate financial advice.
Watch out Contribution limits and account rules change, so verify the current year.
- 6
Transfer financial knowledge
Teach the child how the business generated the wages and how the invested money compounds. Increase their involvement as their age and judgment develop.
Pro tip Review the account together at a regular family money meeting.
Watch out Assets without financial education may not create durable wealth.
In the wild
A five-year-old appears in scheduled website and campaign shoots for a parent's company. The business records the hours, usage, deliverables, and a defensible hourly rate, processes the compensation formally, and contributes an eligible portion to a custodial Roth IRA.
→ The child receives documented earned income and begins long-term investing at an unusually early age.
A family real-estate management company gives children age-appropriate duties during property visits. Parents document the work, pay reasonable wages through the reviewed entity structure, and use part of the earnings for long-term investment accounts.
→ Property operations become a vehicle for both practical education and compliant wealth transfer.
Common mistakes
Using an S corporation without review
Dennis warns that direct S-corporation payroll can trigger payroll taxes that a properly structured family management company may handle differently.
Paying for imaginary work
The child must complete legitimate tasks, and the business should preserve the same evidence it would for another employee.
Transferring money without knowledge
A large account alone does not teach the child how wealth was created, protected, or compounded.
Is it for you?
Best for
It is best for family-owned businesses with authentic, age-appropriate work children can perform and document.
Not ideal for
It is not appropriate when no genuine work exists or when compensation cannot be justified.
From the transcript
“There's two different ways in which we can have your children involved in your business. We can set up a FMC, which is a family…”
“The mistake that business owners make when they're s corpse is they'll place their children on payroll through an S corp.”
“Because once you've paid your children, let's just say you max out the 15,000. You can take 6000 of the dollars that no one paid…”
From the episode
Tax Secrets Every Entrepreneur Should Know with Karlton Dennis
Karlton Dennis