Can I Pay My Child Through My Business? Family Payroll Rules
How family employment works when children perform real work, wages are reasonable, W-2 payroll is handled correctly, and records support the deduction nationwide / all 50 states where permitted.
Quick answer: Yes, you can pay your child through your business when the child performs real work, wages are reasonable, payroll is handled correctly, and records support the work. Entity type matters: the under-18 FICA exception generally applies to a parent's sole proprietorship or qualifying parent-owned partnership, but not to S corporations or C corporations.
Family employment can be a strong tax planning tool for small business owners, but only when it is run like real payroll. The work should be bona fide, the pay should be supportable, the child should actually receive wages, and the records should show what was done, when it was done, and why the compensation was reasonable.
The Foundation: Bona Fide Employment
For wages paid to children to be deductible, the IRS requires:
• Real work performed — actual services that the business needs.
• Reasonable wages — comparable to what an unrelated third party would be paid.
• Age-appropriate tasks — generally older than 7 for any meaningful employment.
• Proper payroll administration — W-2 issuance, withholding (where applicable), employment tax compliance.
The IRS has aggressively challenged sham employment arrangements where children received "wages" for services they couldn't credibly perform. Documentation matters: a written job description, time logs, and records of actual work performed are essential.
The Standard Deduction Sweet Spot
For 2026, the IRS lists a $16,100 standard deduction for single filers. A child with earned income from family employment may be able to shelter wages with the dependent standard deduction rules, but the analysis should also consider unearned income, state tax, payroll tax, and whether the child can be claimed as a dependent.
Before setting the wage amount, model the moving pieces together:
• Federal standard deduction and dependent-return rules.
• State income tax, unemployment, workers' compensation, and local payroll requirements.
• Entity-specific FICA and FUTA treatment.
• IRA or retirement plan eligibility based on taxable compensation.
The FICA Exemption for Children Under 18
One important payroll-tax rule: children under 18 employed by a parent's sole proprietorship or by a partnership owned exclusively by both parents are generally not subject to FICA tax (Social Security and Medicare).
This exemption applies to:
• Sole proprietorships (Schedule C / single-member LLCs).
• Partnerships where both parents are the only partners.
The exemption does NOT apply to:
• S-corporations (FICA applies regardless of relationship).
• C-corporations.
• Partnerships where a non-parent is also a partner.
For a sole proprietor paying a 16-year-old child $16,100 of supportable wages in 2026:
• Federal income tax: potentially $0 if the wages are sheltered by the applicable standard deduction rules.
• FICA tax: $0 (under-18 exemption).
• State income tax: varies.
• Net to the family: The business may receive a wage deduction while the child receives earned income, subject to documentation, payroll, and state tax rules.
Children 18-20 and Children Over 21
The under-18 FICA exemption ends at age 18. For children 18+ employed by a parent's business:
• FUTA (federal unemployment) exemption continues until age 21.
• FICA applies normally.
• Federal and state income tax apply normally (subject to standard deduction).
For S-corp and C-corp employers, FICA always applies regardless of age.
Roth IRA Contributions for Children
Children with taxable compensation may be able to contribute to a Roth IRA up to the lesser of the annual IRA limit or their compensation for the year. The IRS 2026 IRA contribution limit is $7,500 for eligible taxpayers under age 50.
For a child with enough earned income from family employment, Roth IRA funding can start early, but the contribution must be tied to real compensation and the account should be opened and funded under the applicable custodian rules.
The Roth IRA also has planning advantages for young account holders:
• Contributions can be withdrawn at any time without tax or penalty.
• First $10,000 of earnings can be withdrawn tax-free for first-time home purchase.
• Up to $10,000 of earnings can be withdrawn for qualified higher education expenses.
• Roth IRA assets are generally treated differently from ordinary savings in financial aid planning, but distributions and aid rules should be reviewed before using retirement funds for education.
Section 127 Educational Assistance Programs
Beyond direct wages, businesses can establish §127 educational assistance programs providing up to $5,250 per year of tax-free educational assistance per employee. For employed children pursuing education:
• Tuition, books, and required educational fees can be paid by the business.
• Tax-free to the child up to the $5,250 annual limit.
• Deductible to the business as an ordinary expense.
• Available for both undergraduate and graduate education.
• Recently expanded to include qualified student loan repayments.
Documentation Requirements
For any IRS examination of family employment arrangements, documentation should include:
• Written job description outlining the child's duties and responsibilities.
• Time records documenting hours worked and tasks performed.
• Pay stubs showing regular payment intervals (not lump-sum year-end "salary").
• W-2 issued to the child for the year.
• Employment tax filings (Form 941 quarterly or 944 annually) showing the child as an employee.
• Compensation analysis showing the wages are reasonable for similar services.
• Proof of payment via separate check or ACH transfer to the child's bank account.
Age-Appropriate Job Examples
Age-appropriate tasks that have been accepted in IRS examinations:
• Ages 7-12: Modeling for marketing materials, simple administrative tasks (organizing supplies, basic data entry under supervision), running errands.
• Ages 13-15: Social media content creation, photography, video editing, customer outreach via approved channels, inventory management.
• Ages 16-18: Bookkeeping support, scheduling, customer service, web development, content writing, more complex marketing tasks.
• Ages 18+: Full range of business activities consistent with skills and experience.
The Grandparent Application
Grandparents who own businesses can also employ grandchildren — but the under-18 FICA exception generally does not extend to grandchild employment by a grandparent because the exception is tied to parent-employer relationships. Federal income tax treatment, payroll tax, and state rules still need separate review.
For grandparents seeking to transfer wealth to grandchildren tax-efficiently, family employment is one of several available strategies (others include 529 plan funding, annual exclusion gifts, and direct Roth IRA gifts of earned income from grandparent-funded employment).
Wealth Transfer Implications
Beyond current-year tax savings, family employment compounds across decades:
• Building Roth IRA balances in the child's name from earliest possible age.
• Funding 529 plans from the child's earned income.
• Establishing financial responsibility through real work and earned income.
• Reducing parents' future estate by shifting income to lower-tax-bracket children.
• Creating discussion opportunities for financial education.
Common Mistakes
• Paying children for fictional work (entire deduction disallowed on audit).
• Paying children disproportionate to actual services rendered.
• Failing to issue W-2s and run proper payroll.
• Treating the under-18 FICA exemption as available in S-corp employment (not allowed).
• Not establishing the Roth IRA contribution as soon as the child has earned income.
• Inadequate documentation of the work performed and the reasonableness of compensation.
• Family employment in service-business S-corps creating SSTB classification complications.
Bottom Line
Family employment can support tax planning and early retirement savings when it is built on real work, reasonable wages, proper payroll, and audit-ready records. The best result comes from designing the job, wage rate, payroll setup, and documentation before the child is paid, then coordinating the payroll records with the business and owner tax returns.
Family payroll planning needs real work and payroll support
Paying children or family members should be tied to bona fide services, reasonable wages, entity-specific payroll rules, time records, job descriptions, and proper W-2 or payroll reporting.
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