🌶️Do I Need to Set Up a Separate Bank Account for My Dependent?

This is one of the most common questions we get from parents hiring their kids: Does my child need their own bank account for payroll?   Even if the funds end up in a shared family account, the employment arrangement must look legitimate on paper and in practice. That means:

• Proper setup on payroll (or as a subcontractor, if appropriate)
  • Dependents who perform regular, ongoing work should generally be on payroll.
  • Older dependents who provide specialized services may qualify as independent contractors — but only if the relationship meets IRS criteria.
• A reasonable hourly rate
  • The pay must make sense for the work performed.
  • Visit paprikatax.com/ to determine a reasonable hourly rate backed by a CPA-signed opinion letter — the best protection if the IRS ever reviews your records.
• Accurate time tracking
  • Keep logs or simple timesheets that show when and what tasks were completed.
  • This substantiates the deduction and proves that the work was real.

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 How Families Handle the Money

Once the money is earned, you have options:

• Some families keep the funds in the family account, using them for shared expenses like school supplies, family trips, or activities.
• Others choose to invest the money — for example, contributing to a Roth IRA for the child, which can create powerful long-term tax benefits.

Either option is acceptable as long as the wages are legitimate, properly documented, and paid out from the business to the dependent.

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 Bottom Line

The IRS doesn’t care which account the money ends up in — what matters is that you can prove:

• The work was real,
• The pay was reasonable, and
• The payment was properly documented.

When in doubt, PaprikaTax can help you set up everything correctly — from wage substantiation to audit-ready payroll documentation. Ask your question directly through app.paprikatax.com (there’s a question box at the bottom of the form), or book a live consultation at cal.com/paprikatax/30min.

– Written by David Nagy, CPA, paprikatax.com/

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PAPRIKA stands for “Parents Allocate Payroll Rationally Increasing Kids’ Assets”