Hiring your child through your business is a smart way to teach them responsibility, but it can also be a powerful tax strategy when done properly. With the right structure and records, you can shift income into a lower tax bracket, reduce your own taxable income, and invest in your child’s future. But before you run payroll for your child, it’s important to understand the IRS guidelines, especially when using a Family Management Company (FMC) or other business structure.
Why Business Owners Hire Their Children
Tax savings through income shifting
Paying your child moves income from your higher tax bracket to their much lower one. In 2026, a child can earn up to $15,750 without owing federal income tax if they’re under 18 and not claimed as head of household.
Building financial literacy early
By paying your child a real wage, they can learn how to budget, save, and even invest from a young age.
Funding your child’s education, savings, or investments tax-efficiently
Wages paid to your child can be used to fund 529 plans, Roth IRAs, or contribute toward education costs and extracurriculars.
Preparing them for work and responsibility
This is a legitimate job with real expectations. You’re helping them build skills while contributing to the business.
Key IRS Rules on Employing Family Members
What qualifies to the IRS as real work when hiring your child?
The IRS requires that your child perform genuine work necessary for your business. Here are some examples: filing, social media support, customer follow-up, product photography and admin tasks.
Age guidelines and appropriate duties when paying children
There’s no IRS minimum age, but the job must be age-appropriate. A 7-year-old doing heavy admin might raise red flags, but helping organise photos or packing boxes may be reasonable.
Paying reasonable wages to your kids
Compensation must match market value. Don’t pay $50/hour for light tasks. Align their pay with what you’d offer a non-family member for the same job.
Required documentation when hiring your kids
Keep job descriptions, timesheets, and records of work completed. Treat them like any employee. If you use payroll software, make sure it can handle minor employees.
Special Rules for Hiring Your Child in a Sole Proprietorship or Family LLC
FICA and FUTA exemptions for employed children
If your business is a sole proprietorship or a partnership where both partners are the child’s parents, wages paid to your under-18 child are exempt from Social Security, Medicare (FICA), and Federal Unemployment Tax (FUTA).
How business structure affects how you employ and pay your child
Sole props and family partnerships are the simplest setups. S Corporations and C Corps don’t offer the same FICA exemptions, so those require extra caution and usually involve third-party payroll. Using an FMC (Family Management Company) can work in some cases but it must have a legitimate business purpose and economic substance.
When a Family Management Company (FMC) makes sense
FMCs are often used to formalise child employment and reduce liability, but the IRS is sceptical if created solely for tax shifting. Without real operations, the arrangement could be disallowed. It’s best to get professional advice before going down this route by yourself to avoid breaking any rules. You can schedule a no pressure consultation with our firm to see how we could support you with this process.
What Can Your Child’s Wages Be Used For? (And What’s Not Allowed)
IRS-acceptable uses of your child’s wages
✔ Summer camps
✔ School supplies
✔ Sports, arts, STEM programs
✔ 529 contributions
✔ Transportation and clothing
✔ Roth IRA (if your child has earned income)
What crosses the line (and could trigger IRS scrutiny)
❌ Childcare (including after-school care so you can work)
❌ Rent, utilities, or groceries
❌ Paying your own bills or using wages for your legal financial obligations
The IRS may disallow your deduction if wages are seen as a disguised personal expense.
Custodial accounts (UTMA/UGMA) and their limitations
Funds in these accounts must benefit the child, not cover basic support or parental obligations like food or housing.
Common Mistakes That Trigger IRS Audits
Using wages to pay for parental obligations
This is one of the most common audit flags. You must not use the child’s wages to pay for services like daycare that benefit you.
Paying your child wages without proper documentation or reasonable job duties
No timesheets? No clear job? No paper trail? Expect the IRS to challenge the deduction.
Misusing S Corps or FMCs purely for tax avoidance
Forming an entity only to shift income or without real business function can backfire. Always show economic substance and avoid circular logic in payments.
How Much Can You Pay Your Child and Still Get the Tax Break?
Understanding the standard deduction for children
Children can earn up to the standard deduction amount ($15,750 for 2026) without paying federal income tax, assuming they have no other sources of income and are not self-supporting.
Roth IRA and 529 planning with earned income
If your child has earned income, they can contribute to a Roth IRA (up to $7,500 in 2026). This builds wealth and keeps the funds in their name, legally.
Coordinating with your overall family tax strategy
Consider this approach as part of a bigger plan, especially if you also own rental property, have multiple businesses, or are planning for college.
Is It Worth It to Hire Your Child in Your Business?
A Quick Cost-Benefit Analysis
For many families, yes. You get a deduction, your child gets income (taxed at a lower rate), and the family retains wealth.
Payroll setup costs vs long-term tax savings
There’s some admin overhead, setting up payroll, filing forms, but a firm like NTC Accounting Firm can easily handle that for you and the long-term savings and educational value will outweigh the cost.
Administrative effort required
Realistically you should expect to spend some time documenting hours, creating tasks, and tracking work. Hiring your kid isn’t “free money”, it’s a real job.
When to bring in an accountant or tax pro
As soon as you’re considering it. Especially if you’re using an S Corp or FMC, or want to integrate this into your broader tax plan.
How NTC Accounting Firm Helps Families Hire Their Children the Right Way
Payroll setup for minors
We’ll help you legally onboard your child, file the right forms, and ensure you’re in full IRS compliance.
Ensuring audit-proof records
We provide templates, tracking systems, and audit-ready documentation to help keep your deductions safe.
Ongoing advisory for family tax planning and FMCs
Whether you’re a sole prop, run a larger practice, or are considering an FMC, we’ll advise you on how to use this strategy effectively and responsibly.
Thinking about hiring your child through your business?
Book a free consultation with one of our specialists to find out if it’s right for your situation.