If you have children and you own a short-term rental, you may be sitting on a tax strategy you haven't fully explored: paying your kids for legitimate work on your STR.
When done correctly, this is one of the cleanest tax moves available to STR owners. You get a business deduction. Your child earns income taxed at their (much lower) rate. And you can fund their Roth IRA for decades of tax-free growth. It's not a loophole in the gray-area sense — it's income shifting using the existing payroll rules.
- Children employed in a parent-owned sole proprietorship are exempt from FICA (Social Security and Medicare) until age 18.
- Wages up to the standard deduction (~$15,000) result in zero federal income tax for the child.
- The work must be real, the pay must be reasonable, and documentation must be solid.
- Any earned income your child receives can fund a Roth IRA — the compounding benefit over decades is enormous.
The Tax Math Behind This Strategy
Here's why this works so well for high-income STR owners.
Suppose you're in the 35% federal bracket. You pay your 14-year-old $8,000 for real work done on your STR throughout the year. That $8,000 is a deductible business expense for you — saving you roughly $2,800 in federal taxes.
Your child earns $8,000. The standard deduction for 2026 is approximately $15,000. So your child owes zero federal income tax on those earnings.
Net effect: you transferred $8,000 out of your taxable estate at a 35% rate, and your child received it tax-free. The family unit keeps $2,800 that would have gone to the IRS.
If your child puts that $8,000 into a Roth IRA (you can contribute up to 100% of earned income, up to the annual limit), that money grows tax-free for potentially 50+ years.
The FICA Exemption
This is the other major benefit of employing your children in a sole proprietorship or single-member LLC (taxed as a disregarded entity):
Under IRC §3121(b)(3)(A), wages paid by a parent to a child under age 18 in a sole proprietorship or partnership owned entirely by the parents are exempt from FICA. That means no Social Security (12.4%) or Medicare (2.9%) taxes on those wages — for either you or your child.
Important: this exemption does not apply if your STR is in an S-corp or C-corp. If you have an entity election that changes your tax treatment, talk to your CPA before running payroll.
What Work Can Your Kids Actually Do?
The work must be legitimate, age-appropriate, and connected to your rental activity. The IRS expects real services for real pay.
Tasks that work well by age range:
- Ages 7-11 — Simple physical tasks: Helping carry supplies, organizing storage areas, cleaning outdoor furniture, picking up trash, watering plants, sorting linens.
- Ages 12-14 — Administrative support: Data entry, organizing receipts and invoices, taking inventory of supplies, cleaning common areas, assisting with property setup.
- Ages 15-17 — Guest-facing and digital tasks: Responding to routine guest messages (under supervision), creating social media content for the listing, photographing amenities, writing listing descriptions, creating welcome guides, managing supply ordering.
- Ages 18+ — Full professional roles: Cleaning, property inspections, guest check-in coordination, managing reviews, handling bookkeeping.
The key is that you're paying for actual productive labor that contributes to your rental business. The IRS will look unfavorably at wages paid for tasks that weren't actually performed, or pay that's wildly disproportionate to the work.
What Documentation You Need
The IRS doesn't audit the strategy itself — it audits the documentation. If you're ever questioned, you need to show that:
- The work was real and age-appropriate.
- The pay was reasonable for the work performed.
- You ran actual payroll (not just cash transfers).
Time logs: Keep records of what your child worked on, when, and for how long. The same format you use for your own material participation hours works here.
Task evidence: Save examples of work product — screenshots of guest messages they responded to, photos of supply organization, samples of social media posts, copies of listings they drafted.
Actual payroll: Don't pay your kids in cash or informal transfers. Set up payroll through a service like Gusto or ADP, issue actual paychecks, file payroll tax returns (Form 941 or 944), and issue W-2s at year-end. This creates a paper trail that establishes the employment relationship.
Reasonable wages: Pay at or above minimum wage for the applicable tasks. $10-$25/hour is typical depending on age, task complexity, and market rates. Don't pay a 10-year-old $50/hour for stuffing envelopes.
How to Set Up Payroll
The administrative burden is minimal once you establish the system:
- Apply for an EIN for your rental business if you don't already have one (free at IRS.gov).
- Set up payroll software (Gusto is common for small landlords — runs about $40-$50/month).
- Add your child as an employee with their Social Security number.
- Run payroll for hours actually worked — biweekly or monthly.
- File quarterly payroll returns (Form 941 or annual Form 944 if eligible).
- Issue a W-2 by January 31 of the following year.
Your child then files a tax return. At income under the standard deduction, they owe nothing federally.
The Roth IRA Opportunity
Any amount your child earns from legitimate employment can be contributed to a Roth IRA, up to the lesser of their earned income or the annual contribution limit (currently $7,000 for those under 50).
If your 14-year-old earns $7,000 working on your STR and you contribute that amount to a Roth IRA, and they never touch it until retirement at 65, the 51 years of tax-free compounding at a 7% average annual return produces approximately $226,000 in tax-free wealth — from a single year of working on a rental property.
Do this for multiple years and the compounding becomes extraordinary.
What to Avoid
Paying for work not done. The wages must reflect actual services rendered. Paying your kids to "help with the rental" without documented work is not defensible.
Unreasonable compensation. Wages must be consistent with what you'd pay a non-related person for the same work. A teenager doing light cleaning doesn't earn $80/hour.
Informal payment. Cash payments, informal transfers, or allowance payments labeled as wages don't establish the employment relationship. Run actual payroll.
S-corp or C-corp structures. The FICA exemption doesn't apply to corporate entities. If your STR is held in an S-corp, wages paid to your children under 18 are subject to normal payroll taxes.
The Bottom Line: Paying your kids for STR work is a legitimate tax strategy, not a gray area. Use actual work, reasonable wages, proper documentation, and compliant payroll to capture the tax benefits without risk.
Ready to see if you qualify? Try the free STR loophole calculator →