If you run a small business, hiring your kids can be a smart financial move for the whole family. Not only are their wages generally tax-deductible for your business, but it’s also a great way to teach them responsibility and help them start saving early.
But if you have a Solo 401k, you might wonder: Will hiring them affect your plan?
Solo 401k plans are designed for small business owners with no full-time employees (other than a spouse), so adding anyone to your payroll could raise compliance questions.
The Solo 401k Handbook
Learn how self-employed professionals can contribute more, reduce taxes,* and invest with greater control– using one of the most powerful retirement plans available. Download the free guide, updated for 2025.
**Solo 401(k) eligibility and contribution limits depend on IRS rules. Tax benefits depend on your individual situation. Not all business owners or side-income earners qualify. 2025 limits ($70,000 or $77,500 with catch-up) depend on income and plan design. Plan administrators—not Carry—are responsible for compliance. Carry does not provide tax advice, consult a tax advisor.
This article breaks down what you need to know and what to watch out for if you’re thinking about hiring your kids while keeping your Solo 401k.
Solo 401k Eligibility Rules
A Solo 401k is intended for self-employed individuals or business owners with no full-time employees. This includes sole proprietors, partnerships, and certain corporations.
The key eligibility factors are:
✅ Self-Employment Income: You must earn income from self-employment (e.g., freelance work, side business, consulting, etc.).
✅ No Full-Time Employees: Your business cannot have full-time employees eligible to participate in the plan. An exception is made for your spouse if they are employed by the business.
📝 Note: According to the IRS, a full-time employee is generally defined as someone who works 1,000 hours or more per year. If you hire an employee who meets that threshold, you may need to include them in your plan, which could change the nature of your Solo 401k.
What Disqualifies You?
❌ Hiring Full-Time Employees: If you hire one or more eligible full-time employees, you must include them in your retirement plan. At that point, your Solo 401k transitions to a traditional 401k, and additional administrative rules apply.
❌ Changing Your Business Structure: Altering your business structure in a way that includes additional eligible employees can affect your plan’s status.
📌 Check out this guide for more information about Solo 401k:
What Is A Solo 401k? Rules, Eligibility, and FAQ for 2024 & 2025
Are Your Kids Considered Employees?
Yes, your kids may be considered employees under IRS rules, depending on their age, duties, and hours worked. While they are family members, hiring them could affect your Solo 401k if they meet the IRS definition of a full-time employee.
IRS Classification of Children as Employees
Here are the IRS guidelines on the employment of family members:
- Sole Proprietorship or Partnership (Both Parents as Partners): If your business is a sole proprietorship, or a partnership where both partners are the child’s parents, wages paid to a child under age 18 are not subject to Social Security or Medicare taxes. Wages to a child under age 21 are not subject to Federal Unemployment Tax Act (FUTA) taxes. However, income tax withholding still applies, regardless of the child’s age.
- Corporations or Partnerships (Not Both Parents): If your business is a corporation or a partnership where both parents are not partners, then wages paid to your child are subject to income tax withholding, Social Security, Medicare, and FUTA taxes, regardless of the child’s age.
📝 Quick Note: Under IRS rules, an eligible employee is typically defined as someone age 21 or older who works 1,000 hours or more per year. This means children under age 21 can generally be excluded from participating in a 401k plan.
However, hiring your child still requires following federal and state labor laws, including age-based restrictions on work hours and job types. Parents operating sole proprietorships may also qualify for tax exemptions on their child’s wages.
📌 Learn more about age and employment rules here:
401k Age Requirements & Other Eligibility Rules
Does Hiring Kids Disqualify Your Solo 401k?
Hiring your child may disqualify your Solo 401k if they meet the IRS definition of a full-time employee. Once an eligible employee works 1,000 hours or more in a year and does not fall under an exclusion, you are required to include them in your plan. At that point, your Solo 401k would no longer qualify as a one-participant plan.
If hiring your child full-time is necessary for your business, you may need to transition to a traditional 401k plan that allows employee participation and involves additional reporting and compliance requirements.
✏️ Hypothetical Example
Suppose you operate a sole proprietorship and hire your 16-year-old child to work part-time over the summer, totaling 500 hours in the year. In this case, your child would not be considered a full-time employee, and their wages would generally be exempt from Social Security, Medicare, and FUTA taxes. Your Solo 401k eligibility would remain intact.
However, if your child works more than 1,000 hours in the year, they would be considered a full-time employee under IRS rules. This would require you to include them in the plan, which could disqualify your Solo 401k.
📝 Important Note: Continuing to operate a Solo 401k after hiring an eligible employee may trigger compliance issues, including potential penalties or the need to correct the plan under IRS guidelines.
📌 Also Read: Solo 401k Withdrawal Rules & Penalties Explained
Can Your Kids Participate in a Solo 401k?
No, your child generally cannot participate in your Solo 401k, even if they work for your business. Solo 401k plans are limited to the business owner and their spouse — not other employees, including children.
If your child qualifies as an eligible employee, you must either switch to a traditional 401k or risk disqualifying the plan entirely.
Alternative Options If You Hire Your Kids
If hiring your child full-time affects your Solo 401k eligibility, here are some options to consider:
1. Transition to a Traditional 401k Plan
If your child is considered an eligible employee, your Solo 401k must be converted to a traditional 401k plan. This transition involves additional compliance requirements, such as nondiscrimination testing and filing Form 5500 annually.
2. Explore Other Retirement Savings Options
If you’d like to keep your Solo 401k but still help your child save, consider these alternatives:
✅ Custodial Roth IRA: If your child has earned income, you can contribute to a custodial Roth IRA on their behalf. This account offers tax-free growth and qualified withdrawals later in life.
✅ Traditional IRA: If your child has earned income, they may also qualify for a traditional IRA. Depending on your situation, contributions may be tax-deductible.
📌 Also Read: Traditional IRA Withdrawal Rules & Penalties Explained
3. Adjust Work Hours to Maintain Solo 401k Eligibility
To preserve your Solo 401k, you can limit your child’s work hours. According to IRS rules, an employee who works fewer than 1,000 hours in a calendar year generally can be excluded from plan participation.
Bottom Line: Can You Hire Your Kids and Keep a Solo 401k?
It depends on how your child is classified under IRS rules. If they meet the definition of an eligible employee, your plan would no longer qualify as a one-participant plan.
Before making any changes, it’s worth taking time to review the rules carefully. A qualified tax professional or retirement plan advisor can help you determine whether to adjust your child’s working hours, explore separate retirement accounts, or switch to a different plan if needed.
📌 For more details on Solo 401k rules, hiring family members, and plan compliance, here are additional IRS resources you may find helpful:
Disclaimer:
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