Hiring your child in your business can offer potential tax advantages while giving them valuable work experience. However, this strategy requires more than simply adding your child to payroll. The work must be legitimate, the compensation must be reasonable, and the proper records must be in place.
How your business structure affects payroll taxes
Your business entity plays a major role in determining whether special payroll tax rules apply.
If you operate as a sole proprietorship, wages paid to your child may qualify for certain payroll tax exemptions. In qualifying situations, wages paid to a child under age 18 are not subject to Social Security and Medicare taxes. Wages paid to a child under age 21 may also be exempt from federal unemployment tax.
Similar rules can apply to a partnership when every partner is a parent of the child.
The rules change if your business operates as an S corporation or C corporation. In those cases, the corporation is employing your child, not you personally. As a result, the child’s wages are generally subject to income tax withholding, Social Security, Medicare, and federal unemployment taxes.
The work must be legitimate
Hiring your child only works as a tax strategy when your child performs actual work for the business. You cannot put your child on payroll simply to move money out of the company or create a business deduction.
The responsibilities should be necessary and appropriate for your child’s age and abilities. Depending on the business, a child might help with filing, cleaning, organizing supplies, preparing materials, administrative work, or social media.
You should also pay a reasonable wage. The rate should reflect the responsibilities, hours, skills, and typical compensation for similar work. Paying an unusually high wage for a simple task could raise questions.
Documentation is essential
Treat your child like a real employee by keeping accurate records. Track the tasks completed, dates and hours worked, rate of pay, and payroll payments. Complete any required employment and payroll forms as well.
Do not wait until the end of the year to create records for work that was never properly documented. Set up the employment arrangement and payroll process before the work begins.
Benefits beyond potential tax savings
When done correctly, hiring your child can offer more than a possible business deduction. Your child can learn how to follow instructions, earn a paycheck, save money, and manage their finances.
Because they are earning legitimate income, they may also be eligible to contribute to a Roth IRA. Starting retirement savings at a young age could give that money decades to grow.
Keep in mind that your child’s income and assets could affect college financial aid or other income-based programs. Their wages may also create income tax considerations, especially if they have earnings from other sources.
Before hiring your child, speak with a qualified tax professional about the federal and state rules that apply to your family and business structure. With careful planning, hiring your child can support your business while helping them build practical skills and a stronger financial future.
For current federal employment tax rules, review the IRS guidance on family employees and Publication 15.
Key Notes
- Hiring your child may create tax advantages, but the rules depend on your business entity and the child’s age.
- Sole proprietorships and qualifying parent-only partnerships may receive special payroll tax exemptions.
- Corporations generally must withhold and pay the standard employment taxes on a child’s wages.
- Your child must perform legitimate work that is appropriate for their age and abilities.
- Compensation should be reasonable, and all hours, tasks, wages, and payroll records should be documented.
- Earned income can teach financial responsibility and may allow your child to contribute to a Roth IRA.
