Hiring Your Children in Your Business: Tax Rules

Can I pay my child from my business and deduct it?

Yes. A business may deduct reasonable pay for services the child actually performs. Hiring a child does not turn an allowance, a gift, or payment for household chores into a business expense. The tax law requires a reasonable allowance for personal services actually rendered.

Start with work the business needs, such as organizing inventory, preparing mailings, or maintaining business records. Match the job to the child's skills and legal work limits. Set a rate based on similar work in your area, track the hours and duties, and pay the child through payroll. The wages belong on the child's tax record, not the parent's; the IRS explains that a child's earnings from services are the child's income even if a parent receives them.

There is no special tax deduction limit just because the employee is your child. The limit is what is reasonable for the work actually done. A round payment chosen to use up a tax deduction, without matching hours or output, is hard to support.

Is my child's pay free of Social Security, Medicare, and unemployment tax?

Sometimes. For business work in a parent's sole proprietorship or a partnership whose partners are all the child's parents, pay for services performed before the child turns 18 is exempt from federal Social Security and Medicare taxes; pay for services performed before age 21 is exempt from federal unemployment tax, or FUTA. Federal income tax withholding rules still apply. These are age and employer tests, not a blanket exemption for children (IRS: Family employees; 26 USC 3121; 26 USC 3306).

This table concerns federal tax on business wages. If work spans a birthday, apply the age test to each period of work. Wages exempt from Social Security under the parent-child rule do not earn the child Social Security work credits. The IRS employer guide gives different rules for domestic work in a parent's home. State unemployment insurance rules may also differ, so check the state where the child works before deciding which state payroll taxes to omit.

Does it work if my business is an LLC, a partnership, or an S corporation?

Any of these businesses can deduct reasonable wages for real work. A corporation, including an LLC taxed as an S corporation or C corporation, pays ordinary payroll taxes on the child's wages even when a parent owns it. Qualifying parent-owned sole proprietorships and partnerships may use the family payroll exceptions, depending on the child's age (IRS: Publication 15).

For income tax, this LLC reports business income on the parent's return; for employment tax reporting, it uses its own name and employer identification number (IRS: single-member LLCs). Federal regulations preserve the family Social Security, Medicare, and FUTA exceptions for qualifying disregarded entities (IRS: final rule). An LLC's legal name alone therefore does not settle the payroll answer; its federal tax classification and owners do. A corporate or S corporation election ends the family exceptions from the date it takes effect (IRS: Form 2553 instructions).

If you and your spouse own the LLC, check its federal tax classification in spouse and family LLCs before setting up family payroll. A parent's own pay follows separate rules; see paying yourself from an LLC or S corporation owner salary.

How much can I pay my child, and how much can they earn tax-free?

Pay the amount a comparable worker would earn for the child's actual work; there is no automatic amount that becomes deductible. A single dependent child who is a US citizen or resident and has only wages may owe no federal income tax when those wages do not exceed the single standard deduction of $16,100. The dependent deduction grows with earned income but cannot exceed the single-filer cap (IRS: inflation adjustments). A nonresident alien child generally cannot claim that deduction; check their residency and withholding rules separately (IRS: Publication 15).

That is an income tax calculation, not a payroll tax limit or a target salary. Other income, another job, filing status, and the child's dependency status can change the result. Wages above the deduction are not forbidden; they are simply subject to the child's income tax calculation. State income tax may start at a different amount.

Does my child have to file a return, and does the kiddie tax apply to wages?

A child who is a dependent generally files a federal return when wages alone exceed the applicable standard deduction, and may need to file sooner if they also have investment income or another filing trigger. A child should also file to claim a refund of income tax withheld. For a qualifying child (generally under 19 at year-end, or a student under 24), earning wages alone does not end dependency, but the child cannot provide more than half of their own support for the year. Support paid from the child's wages counts as the child's support. An older child can be a dependent only as a qualifying relative, whose gross income must be less than $5,300 (IRS: Publication 501; IRS: inflation adjustments).

The kiddie tax does not apply to genuine wages. It concerns a child's unearned income, such as interest, dividends, and capital gains. If the child has both wages and investments, check whether Form 8615 applies. It does not apply to a child who is 18, or a full-time student aged 19 to 23, whose earned income is more than half of their support. Wages do not become investment income merely because the employer is a parent (IRS: Form 8615 instructions).

Do not assume no federal income tax means no withholding. Give the child Form W-4 and follow the withholding rules. A child who meets the prior-year and current-year no-tax-liability tests may claim exemption from withholding, but must give the employer a new exempt Form W-4 by February 15 each year. Nonresident alien employees generally cannot claim this exemption (IRS: Publication 15).

Should my child get a W-2 or a 1099, and what payroll filings are needed?

A child working as your employee gets a Form W-2, even when the federal family payroll tax exceptions apply. A Form 1099-NEC is for a genuinely independent contractor; choosing that form does not change an employee into a contractor. The IRS looks at control over the work, finances, and the relationship (IRS: worker classification; IRS: Publication 15).

If the child truly runs an independent business, the parent-employee payroll exceptions do not apply. Net self-employment earnings of at least $400 generally trigger a federal return and self-employment tax, even if income tax is zero (IRS: Publication 501; IRS: self-employment tax).

The IRS employment tax calendar describes these returns. A child whose wages are FUTA-exempt may still work for a business that files Form 940 because of other employees. Payroll setup depends on all workers, not just the child.

What records show the job is real if the IRS asks?

Keep a record that connects each payment to work the business received. A short job description, dated timesheets, work samples, the rate used, payroll records, and proof of payment to the child are more useful than a year-end entry labeled “child wages.” Keep employment tax records for at least four years after the tax is due or paid, whichever is later (IRS: record retention).

Before the first payment, gather the child's age, duties, expected hours, proposed rate, business entity and tax classification, owners, and work state. Compare the proposed pay with similar local work. If the child also has another job or investment income, gather those estimates before setting withholding. The deduction rests on real services and reasonable compensation (Internal Revenue Code, section 162).

Can my child put the wages in a Roth IRA?

Yes. A child can contribute to a Roth IRA at any age if they have taxable compensation and meet the Roth income rules. The combined contribution to traditional and Roth IRAs is limited to the smaller of the child's taxable compensation or $7,500 for someone under age 50 (IRS: Roth IRA eligibility; IRS: contribution limits).

The wages count as compensation even when the child's standard deduction eliminates federal income tax. Keep the W-2 and payroll records to support the contribution. A parent may fund the account on the child's behalf, but the contribution is limited by the child's compensation and the annual IRA limit; a gift alone is not the child's earned income.

Do child labor laws limit what my child can do in my business?

Yes. For children under 16, federal rules remove the age and hours limits in a business solely owned by their parents, but still bar mining, manufacturing, and hazardous occupations. For 16- and 17-year-olds, hazardous occupations remain barred. The Department of Labor's child labor guidance describes the nonfarm parent exception. State law may be stricter on age, hours, permits, or tasks. Check applicable minimum wage and overtime rules separately.

For the federal parent exception, the parent must be the sole employer: a sole-owner business qualifies, as can a partnership with only the child's parents as partners or a corporation with only the child's parents as owners. That labor-law ownership test differs from the tax payroll exception: a parent-owned corporation can qualify for the federal child labor exception while still owing ordinary federal payroll taxes on the child's wages (Department of Labor: ownership rule; IRS: Family employees). Check both federal and state rules for the child's age and proposed tasks before the child starts.

Example

Illustrative only; amounts are US dollars. A parent runs a sole proprietorship. Their 16-year-old child spends 200 hours doing permitted filing and inventory work at $20 an hour. The parent keeps weekly timesheets and pays $4,000 through payroll. Assume the child has no other income and remains a dependent.

The business may deduct the $4,000 if the work is real and the rate is reasonable. The wages are exempt from federal Social Security, Medicare, and FUTA taxes under the family employee rules. The child receives a W-2. The $4,000 of wages would be covered by the child's standard deduction, but the parent still follows Form W-4 and payroll reporting rules. If each deductible dollar lowers the parent's federal income tax by an assumed 20 cents, that tax falls by $800 while the child owes no federal income tax on these wages. The deduction also lowers the parent's net self-employment earnings and so their self-employment tax. Actual family savings depend on both returns, state tax, and payroll costs. An S corporation would owe ordinary federal payroll taxes on the child's wages.

Different for you?

• You need the right payroll setup or missed wage filings: bring the child's age, duties, hours, pay rate, entity classification, owners, and state to bookkeeping and payroll help.
• Your S corporation also pays you: your own required compensation is a separate question; see S corporation owner salary.
• You and your spouse own the LLC: confirm its federal tax classification in spouse and family LLCs.
• You want to take money out of your own LLC: see paying yourself.
• You want other business deductions: see lowering your business tax.
• The employer is a Canadian business: Canadian family-pay rules differ; see paying family members in Canada.