Yes, you can pay your children from your business if they perform legitimate work, comply with labor laws, and the compensation is reasonable.
Understanding the Basics: Can I Pay My Children From My Business?
Paying your children through your business is not only possible but also a common strategy among family-owned businesses. However, it’s crucial to navigate this practice carefully to ensure compliance with tax regulations and labor laws. The key is that the work performed must be real, necessary, and compensated at a fair market rate. This arrangement can provide tax advantages for both parents and children, but it requires thorough documentation and adherence to legal requirements.
Many parents wonder if they can simply put their kids on the payroll to reduce taxable income. The simple answer is yes—but only if the children genuinely contribute to the business in a meaningful way. For example, tasks like filing paperwork, answering phones, or helping with social media management might qualify as legitimate work depending on the child’s age and skills.
Legal Considerations When Paying Your Children
Before issuing paychecks to your kids, you must understand the legal framework surrounding this practice. Different rules apply depending on whether your business is a sole proprietorship, partnership, corporation, or LLC.
Child Labor Laws and Age Restrictions
Federal child labor laws regulate when and how minors can be employed. The Fair Labor Standards Act (FLSA) sets minimum age requirements and limits working hours for children under 16 years old. For example:
- Children under 14 generally cannot be employed in non-agricultural jobs.
- Ages 14–15 are allowed to work limited hours outside school time.
- Ages 16–17 have fewer restrictions but cannot work in hazardous jobs.
State laws may impose stricter rules than federal law, so it’s essential to check your local regulations.
The IRS requires that wages paid to family members be reasonable for the work performed. Overpaying children without justification can raise red flags during an audit. The salary must reflect what you would pay a non-family employee doing similar tasks.
Proper documentation protects both you and your child from future disputes or audits:
- Keep detailed job descriptions.
- Maintain timesheets or logs showing hours worked.
- Issue pay stubs outlining wages and deductions.
- File payroll taxes when applicable.
Failing to document these details could lead to penalties or disallowance of deductions.
Tax Advantages of Paying Your Children From Your Business
One of the biggest incentives for paying children through a family business is tax savings. Here’s how this strategy can benefit both parties.
Shifting Income to Lower Tax Brackets
Children usually have little or no other income, so their standard deduction can shelter a significant portion of their earnings from federal income tax. For 2024, the standard deduction for single dependents is up to $14,050 (or $1,250 plus earned income). This means most kids won’t owe federal income taxes on reasonable wages paid by their parents’ business.
By shifting income from a higher-bracket parent to a lower-bracket child, families reduce overall tax liability.
Payroll Tax Savings for Sole Proprietors and Partnerships
If your business is a sole proprietorship or partnership where both parents are owners, paying wages to children under age 18 exempts those wages from Social Security and Medicare taxes (FICA). This exclusion doesn’t apply if your business is incorporated as an S-corp or C-corp.
This exemption results in additional payroll tax savings on top of income tax benefits.
Retirement Account Contributions
Children who earn wages become eligible to contribute to retirement accounts like IRAs or Roth IRAs. This early start helps build long-term wealth while teaching financial responsibility.
Common Types of Work Suitable for Children in a Business
Assigning appropriate tasks based on age and skill level is vital for compliance and effectiveness. Here are some typical roles children might fill:
- Office Assistance: Filing documents, organizing supplies, managing mail.
- Customer Service: Answering phones or responding to emails under supervision.
- Social Media Management: Creating posts or monitoring engagement.
- Inventory Help: Stocking shelves or counting inventory items.
- Lawn Care or Maintenance: Landscaping duties if the business owns property.
- Catering Support: Serving food at events if applicable.
The critical factor is that these duties must be realistic and necessary for your business operations—not just busywork designed solely for tax benefits.
The Payroll Process: How To Pay Your Children Properly
Following proper payroll procedures ensures transparency and compliance with tax authorities.
Step 1: Establish Formal Employment
Even though it’s family-run, treat your child like any other employee:
- Complete Form W-4 so you can withhold federal income taxes if required.
- Obtain an Employer Identification Number (EIN) if you don’t already have one.
- Provide workers’ compensation insurance coverage according to state law.
Step 2: Track Hours Worked Accurately
Use timesheets or digital timekeeping tools to record hours honestly. Avoid inflating hours worked just because the employee happens to be your child.
Step 3: Calculate Wages Based on Market Rates
Determine an hourly wage that matches what you would pay an unrelated employee performing similar tasks in your geographic area.
Step 4: Withhold Taxes as Required
Depending on the business structure:
| Business Type | Treating Wages Paid To Child Under 18 | Payroll Taxes Withheld? |
|---|---|---|
| Sole Proprietorship/Partnership (Parents Only) | No FICA taxes due | No Social Security/Medicare withheld; federal income tax withheld based on W-4 |
| S Corporation/C Corporation/LLC Treated as Corp. | Treated as regular employee wages | FICA taxes withheld; federal/state withholding applies |
| Sole Proprietorship/Partnership (Non-parent partners involved) | Treated as regular employee wages regardless of age | Payroll taxes withheld as normal |
Step 5: Issue Paychecks & File Payroll Reports
Paychecks should reflect gross wages minus any applicable withholding. File quarterly payroll returns using Form 941 and annual returns with Form W-2 reporting wages paid.
Avoiding Common Pitfalls When Paying Your Children From Your Business
Many well-intentioned parents stumble into mistakes that could jeopardize tax advantages:
- No Actual Work Performed: Paying kids without real duties invites IRS scrutiny.
- Lack of Documentation: No timesheets or job descriptions make deductions vulnerable.
- Paying Excessive Wages: Inflated salaries risk being disallowed as unreasonable compensation.
- Ineffective Payroll Procedures: Not withholding required taxes when needed triggers penalties.
- Irrational Age Assignments: Employing very young children in inappropriate roles violates labor laws.
- Mismatched Business Structure Rules: Misunderstanding how different entities affect payroll taxes causes errors.
Taking care upfront saves headaches later during audits or legal reviews.
The Financial Impact: Real Numbers Behind Paying Your Kids From Your Business
To illustrate how this strategy works financially, here’s an example comparing paying a child $10/hour for 10 hours per week over a year versus not paying them at all:
| Description | No Child Employment ($) | $10/hr Child Employment ($) | Savings / Cost Difference ($) |
|---|---|---|---|
| Total Hours Worked Annually (10 hrs/week × 52 weeks) | – | 520 | – |
| Total Wages Paid ($10 × 520 hrs) | – | $5,200 | – |
| Your Tax Bracket (%) – Parent’s Marginal Rate | – | – | – |
| Your Tax Savings by Shifting Income (Assuming 24%) | $0 | $1,248 | $1,248 saved |
| Your Payroll Tax Savings (No FICA on child wages) | $0 | $398 (7.65% × $5,200) | $398 saved |
| Total Tax Savings From Employing Child Annually | $0 | – | $1,646 saved approx. |
| Child’s Standard Deduction Used ($14K limit) | $0 | $5 ,200 | $8 ,800 unused |
| Child’s Federal Income Tax Liability (Assuming No Other Income) | $0 | $0 | Tax-free due to standard deduction |
| Summary: Employing a child at reasonable wage reduces overall family taxable income significantly while staying compliant. | |||
This example highlights how employing your child legitimately reduces taxable income through wage shifting while maximizing deductions available for both parties.
The Role of State Taxes When Paying Children From Your Business
State taxation adds another layer of complexity depending on where you operate:
- Certain states conform fully with federal rules regarding family employment exemptions from payroll taxes; others do not.
- You may owe state unemployment insurance contributions even if exempt federally.
- The child’s state income tax obligations vary widely; some states have no personal income tax at all.
- If operating across multiple states online or physically, ensure compliance with each jurisdiction’s labor laws concerning minors.
Consulting with a local CPA familiar with state-specific nuances helps avoid unexpected liabilities when employing minors within family businesses.
Key Takeaways: Can I Pay My Children From My Business?
➤ Yes, you can pay your children if they perform legitimate work.
➤ Payments must be reasonable and reflect actual services done.
➤ Hiring children can reduce your taxable income legally.
➤ Keep detailed records of hours worked and tasks performed.
➤ Consult tax rules to ensure compliance with IRS regulations.
Frequently Asked Questions
Can I Pay My Children From My Business for Legitimate Work?
Yes, you can pay your children from your business if they perform real and necessary tasks. The work must be appropriate for their age and skills, and the compensation should be reasonable based on market rates.
What Legal Requirements Should I Know When Paying My Children From My Business?
Paying your children requires compliance with labor laws, tax regulations, and proper documentation. Different business structures have varying rules, so understanding these legal frameworks is essential to avoid penalties.
Are There Age Restrictions When Paying My Children From My Business?
Federal child labor laws set minimum ages and limit working hours for minors. For example, children under 14 usually cannot work in non-agricultural jobs, while those aged 14–17 have specific restrictions depending on age and job type.
How Can I Ensure the Pay Is Reasonable When Paying My Children From My Business?
The IRS requires that wages paid to children reflect what you would pay a non-family employee for similar work. Overpaying without justification can trigger audits, so keep records of job duties and comparable wages.
What Documentation Is Needed When Paying My Children From My Business?
You should maintain detailed job descriptions, timesheets, pay stubs, and payroll tax filings. Proper documentation protects your business and your children from disputes or IRS scrutiny in the future.