Hiring Your Child in the Family Business

If you own a business, you can put your own child on the payroll — and the tax code treats it unusually well. But the rules turn on your entity type, and the whole thing only works if the job is real.

Why This Is Worth Doing

Hiring your child in the family business is one of the few arrangements where the tax code, the labor rules and the long-term investing case all point the same way — provided you get the entity right and treat it as real employment rather than a transfer of pocket money.

Three things happen at once when a business owner pays their own child properly.

• The business deducts the wages. Money that would have been taxed as business profit becomes a deductible expense, at your marginal rate.
• The child usually owes no federal income tax on it, because a dependent’s standard deduction covers earned income up to the regular standard deduction amount — $16,100 for 2026.[1]
• The wages are earned income, which is the only thing that opens a custodial Roth IRA.

So the same dollar moves from your higher bracket to your child’s zero bracket and lands somewhere it can compound for fifty years. There is no other move on this site that does all three at once.

The Entity Rule That Decides Everything

Most of the tax advantage people have heard about is real for exactly one group of business owners, and absent for the rest. The dividing line is how your business is organized.[2]

Source: IRS, Family employees.[2] Note that the exemptions vanish the moment the business is a corporation — including an S-corp, which is how a great many small businesses are organized. If you have an LLC, what matters is how it is taxed: an LLC taxed as a sole proprietorship or as a parents-only partnership qualifies; one that has elected corporate treatment does not.

This is the single most common place the advice online goes wrong. The “pay your kids and skip payroll tax” version circulating on social media is describing the first row only, and most people repeating it have not checked which row they are in. Check yours before you plan around it.

The Work Has to Be Real

The test is whether you would have paid someone else to do this. Filing, shredding, data entry, cleaning the shop, packing and labelling orders, stuffing envelopes, photographing inventory, basic social-media production, answering a phone, stocking shelves, yard and site cleanup — these are real jobs that businesses genuinely pay for, and a child of the right age can do them.

What does not work: paying a four-year-old a salary for “inspiration,” describing normal household chores as employment, or writing a check without any corresponding work. The IRS position is not exotic here — it is the ordinary requirement that a deducted expense be for services actually rendered.

Household chores are not business work. Making a bed, mowing the family lawn, and watching a sibling are family life, not payroll. If you want to pay for those, pay an allowance — see Allowance & Earning. Only work for the business can be a business expense.

What Counts as Reasonable Pay

The standard is what you would pay an unrelated person for the same work, in your area, at that skill level. That is usually a modest hourly rate, not a round number chosen to hit a tax target.

Two habits keep this defensible. Pay by the hour against a recorded timesheet, rather than a flat monthly figure that never varies. And write down the rate and the reasoning once, at the start — “$14/hour for order packing and inventory photography; comparable local part-time rate is $13–16” — so the number has a story that is not “the standard deduction divided by twelve.”

Pay it the way you pay anyone else: on a regular schedule, by transfer or check, into an account in the child’s name. Cash from the register with no trail undoes the entire arrangement. The account itself is covered in Bank Accounts for Kids: A Parent’s Guide.

Minimum wage is the floor under “reasonable”

Reasonable pay is a ceiling test — the IRS cares that you did not overpay. Minimum wage is the floor, and it is a different law with different coverage, so clear both.

The federal minimum is $7.25 an hour, and where a state or city sets a higher figure, the higher figure governs. A youth minimum wage of $4.25 is available for employees under 20 during their first 90 consecutive calendar days with an employer, though many states do not permit it.[3] Two practical points follow. Minimum wage applies regardless of the child’s age — there is no exemption that begins or ends at 18. And the parental exemption you may have read about is an exemption from the child labor rules, not from the wage rules; it never authorizes paying your own child less than the applicable minimum.

Whether federal wage law reaches your business at all depends on coverage. It applies to enterprises with at least $500,000 in annual dollar volume, and separately to any individual employee engaged in interstate commerce or producing goods for it — which, in practice, catches a great many small businesses that ship, take card payments, or sell online.[3] Below those thresholds your state minimum wage law usually still applies on its own terms. Check the state rate before you set an hourly figure, and re-check it each January, since most states now index it.

Which federal taxes apply, and at what age

For a sole proprietorship, or a partnership in which every partner is the child’s parent, the payroll taxes switch on at three different ages. This is the table worth keeping:

Income tax withholding applies at every age, though a child whose total income stays under the standard deduction generally owes no income tax and may be able to claim exemption from withholding on their Form W-4.[4] The two exemptions above are the whole financial advantage of the arrangement, and both vanish the moment the business is a corporation, an S corporation, or a partnership with any non-parent partner — in those entities all three taxes apply at every age. That is the entity rule from earlier, restated as a payroll consequence.

State taxes have no such age break

Do not assume the federal age exemptions carry over. State income tax withholding follows your state’s own rules and is generally not age-dependent, so a 15-year-old whose wages are exempt from Social Security and Medicare may still have state tax withheld from the same paycheck. Most states also run their own unemployment insurance system with its own family-employment rules, which may or may not mirror the federal FUTA exemption.

Two situations are worth a professional’s hour rather than an internet search: your child lives or works in a different state from the business, which raises which state’s withholding applies and whether you have created a filing obligation there; and your state runs a paid family leave or disability payroll tax, which often has no family exemption at all. Ask your state department of revenue and your payroll provider before the first paycheck, not at year end.

Child Labor Law: What You Can Actually Ask For

Tax law and labor law are separate questions, and the second one catches people who cleared the first.

Federal child-labor rules include a parental exemption, and its scope mirrors the tax rule almost exactly: it applies when the business is a sole proprietorship or a partnership in which every partner is the child’s parent.[5] Within that exemption, a child under 16 may work any hours, at any time of day, in most occupations — the usual limits on hours and school-night timing do not apply.

Three limits survive the exemption, and they are absolute:

• Manufacturing and mining are excluded, whoever owns the business.
• Hazardous occupations require age 18. The Department of Labor designates a set of hazardous occupation orders — power-driven machinery, roofing, excavation, most driving, meat processing and others — and the parental exemption does not override them.[5] This is where family construction, manufacturing, and food businesses get into trouble with the best of intentions.
• If your business is a corporation, you have no parental exemption at all — the standard federal rules on ages, hours, and school nights apply to your own child.

State law runs alongside the federal rules and is frequently stricter, including on work permits for minors. Where they differ, the stricter rule governs. Check your state labor department before the first shift, not after.

The Paperwork, Start to Finish

This is a real employment relationship, so it generates real paperwork. None of it is difficult; all of it is necessary.

1. Write a one-line job description and the agreed hourly rate before any work happens.
2. Have the child complete a Form W-4, the same as any employee.
3. Keep timesheets. Date, hours, what was done. This is the single most important record, and the one families skip. Our Children’s Paycheck Tracker is built for exactly this.
4. Run the pay through payroll on a regular schedule, into the child’s own account.
5. Issue a W-2 after year end. Yes, even for a small amount, and even when no tax was withheld — the W-2 is what documents the earned income later.
6. File the employment returns your entity requires, and confirm which apply given the exemptions above. Publication 15 is the reference.[6]
7. Keep it all together, with the child’s Roth IRA statements, in one folder per year.

The Real Payoff: the Roth IRA

The payroll-tax savings are pleasant. They are not the reason to do this.

The reason is that a W-2 from your business is the cleanest earned-income documentation a child can have, and earned income is the only key that opens a Roth IRA. A ten-year-old with legitimate wages and a paper trail can have a retirement account. One with an allowance cannot — allowance is not earned income no matter how hard it was to earn.[7]

Contributions are capped at the lesser of what the child earned or the annual limit ($7,500 for 2026), and the dollars can come from anywhere — many families let the child keep the cash and fund the Roth themselves, up to what was earned. What cannot come from anywhere is the documentation.

Run the arithmetic once and the point makes itself: a few thousand dollars contributed in the elementary-school years, left alone in a low-cost index fund, has sixty years to work. Nothing else available to a family compounds for that long.

When to bring in a CPA: if your business is a corporation, if you are considering a family management company to work around the entity rule, if the amounts are large relative to your profit, or if your state has its own wrinkles. This page is the map, not the terrain — and the surrounding tax picture is in Tax Strategies.