If you’re a business owner wondering whether you can pay your child to work in your business and lower your tax bill, the short answer is yes. Hiring your child as a legitimate employee is one of the most underused tax strategies available to small business owners and self-employed entrepreneurs. But it’s not as simple as cutting a check and writing it off.
The IRS has specific rules for paying your child in your business, and a payroll audit is no more fun than an income tax audit. Below, I’ll walk you through exactly how the deduction works, what the IRS requires, and the most common mistakes that get business owners in trouble.
Does paying your child count as a business tax deduction?
Yes. When you put your child on payroll, their wages are deducted as a business expense, just like any other employee’s pay. That deduction lowers your taxable business income, which lowers the tax you owe.
Because it counts as employee payroll, you have to follow payroll tax rules. The IRS knows that business owners use this strategy to shift income to a lower-tax-rate family member, so they pay close attention to whether the arrangement is legitimate. If it isn’t, the deduction can be disallowed and you can owe back taxes, penalties, and interest.
IRS rules for hiring your child in your business
There are three rules every business owner needs to follow before putting a child on payroll.
1. Your child must actually be an employee
You can’t pay your child to move money out of your profit and call it a deduction. Your child has to do real work that is ordinary and necessary for your business.
For example, if you run an online coaching business, hiring your child to mow the lawn at home is not an ordinary and necessary business expense. But hiring your child to clean your home office once a week, file paperwork, model for your social media, or stuff client gift boxes can absolutely qualify.
Common age-appropriate jobs include cleaning the office, filing, shredding documents, social media help, photo shoots, packing orders, simple data entry, and basic website tasks.
2. The pay must be reasonable
The amount you pay your child has to be reasonable for the work being done and the child’s age and experience. You can’t pay an 8-year-old $100 an hour for social media posting. You wouldn’t pay a hired social media manager that rate, so the IRS won’t accept it for your child either.
Pay should also match what the child is realistically capable of. A 3-year-old and a 12-year-old aren’t going to earn the same wage because they aren’t doing the same level of work.
A good rule of thumb: pay what you’d pay an unrelated person to do the same job at the same skill level.
3. You have to follow legal payroll requirements
If you hire your child as an employee, you have to run them through payroll like any other employee. That means:
- A signed Form W-4 on file
- Pay issued by check or direct deposit (never cash) into the child’s bank account or custodial account
- Time sheets that document hours worked and tasks completed
- A Form W-2 issued at the end of the year
- Payroll records kept on file with the rest of your business records
The paper trail is what protects you in an audit. If you can’t show the work was done, the wage was reasonable, and the money actually moved, the deduction is at risk.
How payroll taxes work when you pay your child
There’s a meaningful tax break for kids under 18, but it depends on how your business is structured.
If your business is a sole proprietorship or a partnership where both partners are the child’s parents, wages paid to your child under age 18 are not subject to Social Security and Medicare (FICA) taxes. Wages paid to a child under 21 are also exempt from Federal Unemployment Tax (FUTA).
If your business is an S corporation, C corporation, or a partnership with a non-parent partner, FICA and FUTA apply just like with any other employee.
Federal income tax depends on the standard deduction in the year you’re filing. The standard deduction adjusts annually for inflation, so check the current year’s amount before you plan your strategy. As long as your child’s earned income stays at or below the standard deduction, they typically owe no federal income tax on those wages.
Don’t forget state and local taxes. State standard deductions are usually different from the federal amount, and your child still has to follow state and local payroll and filing rules.
Should you still file a tax return for your child?
Yes. Even if your child owes zero tax, file the return anyway.
Once you issue a W-2, the IRS has a record of that income. Filing protects both of you. If you’ve ever received a letter from the IRS saying they have a record of income that wasn’t reported, you know how stressful (and expensive) that can be to clean up. A zero-balance return takes a few minutes and saves headaches later.
Your child can still be claimed as a dependent on your tax return while filing their own return for the wages they earned.
Can you make your pet an employee?
No. This has been tried, and it doesn’t work. A pet can’t be a W-2 employee.
If you have a documented disability and use a service animal, the costs related to that animal may be a deductible expense for your business in some cases, but that is a separate category. It does not turn your pet into an employee.
Bonus benefit: tax-advantaged savings for your child
One of the most powerful pieces of this strategy: once your child has earned income, they’re eligible to contribute to a Roth IRA. Even small contributions invested over decades can grow into significant retirement savings, and the contributions are tax-free at withdrawal. Pairing legitimate child payroll with a custodial Roth IRA is one of the smartest long-term wealth moves a family business owner can make.
Should you hire your child in your business?
If the work is real, the pay is reasonable, and you’re willing to run proper payroll, hiring your child can be a strong tax strategy. It reduces your business’s taxable income, gets money to your kids tax-free or low-tax, and teaches them real-world work skills.
The catch is that the IRS scrutinizes these arrangements. Skipping payroll documentation, paying unrealistic wages, or using your child to move money around will turn a smart strategy into an audit problem fast.
Talk to a tax professional before you start. Setting it up correctly the first time costs less than fixing it later.
Frequently asked questions
Can I pay my child in cash?
No. You need a clear paper trail. Pay by check or direct deposit into the child’s account.
What’s the youngest age I can hire my child?
There’s no federal minimum age when the parent owns the business, but the work must be age-appropriate and reasonable. Practically, kids as young as 6 or 7 can do simple jobs like modeling, filing, or sorting.
Do I need to issue a 1099 or a W-2?
W-2. Your child is an employee, not an independent contractor.
Does this work if I have an LLC?
It depends on how your LLC is taxed. A single-member LLC taxed as a sole proprietorship qualifies for the FICA exemption for kids under 18. An LLC taxed as an S corp does not.
How much can I pay my child tax-free?
Up to the federal standard deduction for the year, the child generally owes no federal income tax. Check the current year’s standard deduction amount before you plan.
Related reading: Do I Have a Hobby or a Business?
All information on this site is provided for general education purposes only and may not reflect recent changes in federal or state laws. It is not intended to be relied upon as legal, accounting, or tax advice. Always consult with a tax or accounting professional about your specific situation before taking any action.
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