Why Business Owners Hire Their Children

Tax savings through income shifting

Paying a child through your business allows you to shift income from a higher tax bracket (yours) to a lower bracket (theirs). If the child earns under the standard deduction threshold ($15,750 in 2026), their wages are tax-free at the federal level. For the business, it’s a deductible wage expense, lowering taxable income.

Building financial literacy early

By giving your child legitimate work and pay, you create early financial responsibility. Kids learn how to budget, save, and understand taxes.

Funding education, savings, or investments tax-efficiently

Wages paid can be contributed to a 529 plan or Roth IRA (if they have earned income), funding long-term goals using tax-advantaged accounts.

Preparing them for work and responsibility

Having your child work in the business reinforces discipline, work ethic, and accountability, skills useful for any future career.

Key IRS Rules on Employing Family Members

What qualifies as real work when hiring your child?

The IRS requires that children perform bona fide work which means real services that directly benefit the business. Examples include:

• Filing and document organisation

• Cleaning or inventory management

• Social media assistance or marketing tasks

• Helping at events or on site

The work must be age-appropriate and actually performed. Fake or inflated job titles raise audit risks.

Age guidelines and appropriate duties when paying children

There is no minimum age under IRS rules, but work must be reasonable for the child’s age. Examples:

• Ages 7–11: office filing, scanning, packaging

• Ages 12–15: digital tasks, errands, content creation

• Ages 16+: admin tasks, customer service, marketing

Avoid assigning duties that violate child labour laws. Hours and roles should reflect real business needs.

Paying reasonable wages to your kids

Wages must be reasonable compensation for the services provided, not excessive or symbolic amounts. You must pay the going market rate for similar work by a non-family employee. Track time and tasks carefully.

Required documentation when hiring your kids

Keep audit-proof records:

• Written job descriptions

• Timesheets or digital tracking logs

• Copies of work output (e.g., photos, files)

• Payroll setup (W-4, I-9, and employment forms)

• Payment proof (e.g., cheques/direct deposits to your child’s account)

Special Rules for Hiring Your Child in a Sole Proprietorship or Family LLC

FICA and FUTA exemptions for employed children

If the business is a sole proprietorship or partnership with both parents as partners, children under 18 are:

• Exempt from Social Security and Medicare (FICA)

• Exempt from Federal Unemployment (FUTA) taxes if under 21

This can significantly reduce your payroll tax burden.

How business structure affects how you employ and pay your child

• Sole Proprietorship or Two-Parent Partnership: Full FICA/FUTA exemption applies.

• S Corporation or Family Management Company (FMC): FICA and FUTA still apply. You must run formal payroll and withhold taxes like any other employee.

The IRS scrutinises FMC setups closely, especially if created only for income shifting. Substance matters more than structure.

When a Family Management Company (FMC) makes sense

An FMC can centralise admin and operations for multi-entity households or complex business families. However, it must:

• Have a clear business purpose

• Conduct real business activities

• Employ family members legitimately (with tasks, pay, hours)

If the FMC only exists to pay the child and reduce taxes, the IRS may reclassify wages and disallow deductions.

What Can Your Child’s Wages Be Used For? (And What’s Not Allowed)

IRS-acceptable uses of your child’s wages

Once paid, the funds belong to the child and must be used for their benefit. Examples:

• School supplies and technology

• Summer camps, STEM programmes, extracurriculars

• 529 contributions

• Roth IRA contributions

• Clothing, sports gear

• Personal savings or investment accounts

What crosses the line (and could trigger IRS scrutiny)

You cannot use your child’s wages to:

• Pay childcare so you can work

• Cover your rent, utilities, or bills

• Repay your own personal debts

Doing so risks the IRS reclassifying wages as disguised parental expenses, voiding the deduction and potentially triggering penalties.

Custodial accounts (UTMA/UGMA) and their limitations

Even if funds are in a UTMA or UGMA account, they cannot be used for:

• Basic support (food, housing)

• Childcare expenses

• Any legal obligation of the parent

These funds must solely serve the child’s independent interests, not yours.

Common FMC Mistakes That Trigger IRS Audits

Using wages to pay for parental obligations

This is the most common violation. Childcare is the legal responsibility of the parent. Using wages to pay it makes them non-deductible and raises red flags.

Paying your child wages without proper documentation or reasonable job duties

Lack of a job description, no timesheets, inflated hours, or vague services (e.g. “misc. help”) will not hold up under audit.

Misusing S Corps or FMCs purely for tax avoidance

The IRS will disallow deductions and treat the structure as abusive if there’s no legitimate economic activity or the child doesn’t actually work.

How Much Can You Pay Your Child and Still Get the Tax Break?

Understanding the standard deduction for children

In 2026, a child can earn up to $15,750 without owing federal income tax. Paying just under this threshold creates zero tax liability and allows full wage deduction for your business.

Roth IRA and 529 planning with earned income

Wages count as earned income. This opens the door for:

• Roth IRA contributions: up to $7,500 per year

• 529 contributions: fund education tax-efficiently

Coordinating with your overall family tax strategy

Wages to children should align with:

• Your personal income level and bracket

• Spouse’s income

• Retirement and investment goals

• Household cash flow

Work with a tax advisor to optimise timing, amount, and structure.

Is It Worth It to Hire Your Child in Your Business?

A Quick Cost-Benefit Analysis

Pros:

• Significant tax savings

• Financial education

• Access to retirement and education accounts

Cons:

• Setup and admin time

• Risk of mistakes without guidance

Payroll setup costs vs long-term tax savings

Expect setup costs: payroll provider fees, documentation, etc. But the long-term tax savings often outweigh the admin burden.

Administrative effort required

Properly hiring your child requires:

• Payroll software or provider

• Accurate documentation

• Time investment upfront

When to bring in an accountant or tax pro

If you’re unsure how to:

• Run compliant payroll

• Document work

• Structure the FMC properly

…work with a specialist accounting firm like NTC Accounting Firm.

How NTC Accounting Firm Helps Families Hire Their Children the Right Way

Payroll setup for minors

We help you set up compliant payroll for children, choosing the right business structure and ensuring exemptions apply where possible.

Ensuring audit-proof records

NTC builds proper documentation systems (timesheets, logs, job descriptions, payroll reports) to protect you from audit risk.

Ongoing advisory for family tax planning and FMCs

From setting up an FMC to long-term advisory, we support tax-efficient strategies that withstand scrutiny and align with your financial goals.

Ready to fix or optimise your family payroll strategy?
Reach out to our team to schedule a no-obligation consult. We’ll review your current FMC, documentation, and tax positioning to help you get back in compliance and stay there.