🌶️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.

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.

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

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/

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