Hiring Your Children in the Family Business: Wages, Payroll Tax, and the Paper Trail

The wage rate rarely breaks a plan to put your kids on payroll. The entity does. A child under 18 working for a parent's sole proprietorship skips Social Security and Medicare tax. The same child working for the parent's S corporation pays both, and so does the company.

So the first question isn't "how much can I pay my kid?" It's "who is the employer?" Answer that, then set a wage for real work at a market rate, and keep the records you'd keep for any other employee.

The entity decides the payroll tax

The IRS page on family employees lays out the rules. In summary:

Plenty of established service businesses are taxed as S corporations. If yours is one, the payroll-tax exemption that headlines most articles on this topic doesn't apply. The child is a regular employee for FICA purposes. The plan can still work, but the math is different, and owners who assume the exemption end up with underpaid payroll taxes.

What the wage does on each side

On the business side, a reasonable wage for real work is a deductible business expense like any other payroll.

On the child's side, earned income is sheltered by the standard deduction. For 2026, the IRS inflation adjustments set the standard deduction for a single filer at $16,100. A child whose only income is wages under that amount generally owes no federal income tax on them. If you claim the child as a dependent, their standard deduction is capped at earned income plus a small inflation-adjusted add-on, but for a child whose income is all wages, that cap still covers the full wage up to $16,100.

The wage also creates compensation for an IRA. The IRS announced a 2026 IRA contribution limit of $7,500. Publication 590-A limits a contribution to the smaller of the annual limit or the person's taxable compensation for the year. A child who earns $7,500 or more from real work can fund a Roth IRA up to that limit, decades before they'd otherwise start.

Illustrative math: sole proprietorship vs. S corp

Hypothetical figures. A parent in the 35% federal bracket pays a 16-year-old $12,000 for the year for social media scheduling, file scanning, and inventory counts, at a rate consistent with what a part-time assistant would earn.

The 7.65% figures are the 6.2% Social Security and 1.45% Medicare rates in Publication 15. In the sole proprietorship, the wage also reduces the parent's net self-employment earnings, which is an additional saving not shown in the table.

The S corporation version is still positive. The employer's $918 is itself deductible, worth about $321 more at 35%, which brings the saving to roughly $2,685. That's still well short of the $4,200 headline, and the child's withheld FICA is real money leaving the family.

If you're an S corporation owner and the $4,200 version is the one you were promised, check the math against your own entity before the first paycheck. A Leak Check on owner pay and family payroll shows which entity should be the employer and whether the FICA cost eats the saving.

The partnership route

The table shows a second exemption path: a partnership in which each partner is a parent of the child. Some families who operate through an S corporation consider a separate parent-owned partnership or sole proprietorship that performs real services, employs the children, and bills the S corporation.

That only works if the second business is genuine. It needs its own work, its own books, an arm's-length fee for real services, and a reason to exist beyond the payroll exemption. Have your CPA or tax attorney review it before you set it up. For a family business with several entities, our guide to fractional CFO support for family-owned businesses covers how compensation decisions run across the structure.

The work has to be real

The deduction rests on the wage being reasonable pay for work actually done. In practice:

• Age-appropriate tasks. A 15-year-old can scan files, prepare mailings, edit video, or model for marketing photos. A 6-year-old can do very little that a business would pay for.
• Market pay. Set the hourly rate at what you'd pay an unrelated part-timer for the same task. A teenager doing data entry at $90 an hour is a red flag.
• Hours that fit a school schedule. Summer and weekend hours are more credible than 30 hours a week during the school year.

Federal child labor law has a parental exemption, with limits. The Department of Labor's Fact Sheet #43 says children of any age can generally work for businesses entirely owned by their parents. However, those under 16 can't be employed in mining or manufacturing, and no one under 18 can work in an occupation the Secretary of Labor has declared hazardous. State law may add rules on top.

Building the wage from hours, not from the deduction

Start with the work and let the annual total fall out of it. For the hypothetical 16-year-old above:

School year: 10 hours/week x 30 weeks  =   300 hours
Summer:      30 hours/week x 10 weeks  =   300 hours
Total hours                             =   600 hours
Rate (market for a part-time assistant) x   $20/hour
Annual wage                             = $12,000

Done this way, the $12,000 has an explanation for every dollar: tasks, hours, and a rate you could defend against a job posting for the same role. Done the other way, starting from "the standard deduction is $16,100, so let's pay that," the wage has no explanation at all. Only the first version survives a question from an examiner.

If the honest hours only support $5,000, pay $5,000. It still shelters income, still funds a Roth IRA up to the compensation earned, and doesn't put the rest of the deduction at risk.

The paper trail

The IRS will look at the substance. Your file should show it:

• A written job description with the tasks, the rate, and how you set it.
• Timesheets filled in as the work happens, not reconstructed at year-end.
• Payroll through your normal provider, with a W-4, withholding where it applies, and a W-2 at year-end. Don't pay family members from petty cash.
• Pay into an account in the child's name, not the parents' joint account. Money that moves straight back to the parents undercuts the whole arrangement.
• Samples of the work: the posts scheduled, the files scanned, the photos used.

The Bennett guide to employer and employee taxes covers the general payroll mechanics if this is your first family employee.

Where this goes wrong

• An S corporation owner who skips FICA because they read about the sole-proprietor exemption.
• Wages for household chores, which are not services to the business.
• A single December payment with no timesheets.
• Pay far above market for the task.
• Kids who are too young to do the work they're being paid for.

Where it fits in the owner-tax plan

Paying your children is a family-wealth move as much as a tax one. It moves income from your bracket to theirs and starts a Roth IRA early. It belongs in the same annual review as your S corp reasonable salary, the Augusta Rule for home meetings, and your retirement funding, because each changes the same forecast. That review is part of the planning our fractional CFO services run before the year closes, alongside the strategies in our list of tax moves CPAs miss.

Here's the calculation to run next: write down the tasks your child could genuinely do, the hours, and a market rate. Multiply it out, then apply the table above for your entity type. If the family saving is under $1,500, the admin may not be worth it. If it's larger, or you're unsure which entity should be the employer, take the numbers to a Leak Check and get a straight answer on the structure before the first paycheck.