By Ted Stricker, CFP®
For many business owners, the family business is more than an income source. It’s a place to teach responsibility, discipline, and financial literacy.
When structured correctly, employing your children can also create legitimate tax planning opportunities. By paying your child a reasonable wage for real work performed, you may reduce taxable business income and, depending on your entity type, potentially minimize certain payroll taxes.
Like most tax strategies, success depends on proper execution and documentation.
How Paying Your Child Can Reduce Taxable Income
Wages paid to your child for legitimate services are generally deductible as a business expense. That deduction reduces your business’s taxable profit.
In certain structures, payroll tax exemptions may also apply. When available, these exemptions can make hiring your child more tax-efficient than hiring a non-family employee for similar work.
This strategy is well established under IRS rules, but it must be implemented carefully.
Understanding Payroll Tax Exemptions
Employers are typically responsible for:
- Social Security and Medicare taxes (FICA)
- Federal unemployment tax (FUTA)
However, special exemptions may apply when hiring your own child. The availability of those exemptions depends on both the child’s age and your business structure.
Sole Proprietors and Single-Member LLCs
If your business operates as a sole proprietorship or a single-member LLC treated as a disregarded entity:
- Children under age 18: Wages are generally not subject to Social Security and Medicare (FICA).
- Children under age 21: Wages are generally not subject to federal unemployment tax (FUTA).
Because these payroll taxes may not apply, compensation paid to your child can create additional family-level tax efficiency while remaining fully deductible to the business.
Why Entity Structure Matters
Your business structure directly affects how these rules apply:
- Single-member LLCs: Often treated like sole proprietorships for payroll exemption purposes.
- Husband-and-wife businesses: Exemptions may apply if the child is related to both owners, but technical details matter.
- S Corporations and C Corporations: These entities generally do not qualify for FICA and FUTA exemptions when paying wages to children, though wages remain deductible.
Before implementing this strategy, it’s important to evaluate your business’s structure to confirm it aligns with the payroll tax exemptions. For example, sole proprietors and single-member LLCs may benefit from certain tax advantages that other entities, like S-corps or C-corps, do not offer. Understanding these differences helps you make the most of this tax-efficient strategy.
A Practical Illustration
Assume you operate a single-member LLC and pay your teenager for legitimate administrative or marketing assistance.
- The wages are deductible to your business.
- FICA and FUTA taxes may not apply (based on age and structure).
- Your child reports the income on their own return.
Because earned income is subject to the dependent standard deduction rules, your child may owe little or no federal income tax below certain thresholds.
The result is a lawful shift of income into a lower tax bracket within the family while reducing business taxable income.
Compliance Is Critical
To preserve the integrity of the strategy, the IRS expects:
- Real, age-appropriate work
- Reasonable compensation
- Proper payroll reporting and documentation
Common roles for children in a family business include administrative support, office organization, marketing assistance, social media support, or other legitimate tasks that directly support the business. These tasks can vary depending on the nature of your business. For example, if you’re in real estate, your children could assist with property site visits or listing photography, tasks that are both practical and valuable in your business operations.
By clearly defining and documenting these legitimate roles, you not only maintain compliance with IRS regulations but also shield both the deduction and the payroll treatment, while providing your child with valuable work experience. This approach allows you to reduce taxable income for the business in a tax-efficient manner.
What About the Kiddie Tax?
The “kiddie tax” generally applies to unearned income such as dividends and interest.
Wages paid for legitimate work are considered earned income and are typically not subject to kiddie tax rules. This distinction makes compensation through a family business fundamentally different from passive income shifting.
Coordinating the Strategy Properly
Hiring your child can be a practical teaching tool and a legitimate tax planning opportunity—when handled correctly.
At Bernath + Rosenberg, we help business owners evaluate:
- Whether their entity structure allows payroll exemptions
- Appropriate compensation levels
- Proper payroll and documentation procedures
- How this strategy fits within broader tax planning
Are you considering employing your child in your business? We welcome the opportunity to review your structure and confirm everything is implemented cleanly and compliantly. We’re here to be your financial services team.
Call (212) 221-1140 or email tstricker@brwealth.com to schedule a consultation.
Frequently Asked Questions About Family Business Tax Planning
Is it legal to hire my child in my business?
Yes. Hiring your child is permissible when the work is legitimate, compensation is reasonable, and payroll documentation is properly maintained in accordance with IRS rules.
Do payroll taxes apply when I hire my child?
For sole proprietors and certain LLCs, wages paid to children under age 18 are generally exempt from Social Security and Medicare taxes, and wages paid to children under age 21 are typically exempt from federal unemployment tax. Corporations generally do not qualify for these exemptions.
Does the kiddie tax apply to wages paid to children?
No. The kiddie tax primarily applies to unearned income such as dividends and interest. Wages earned for legitimate work are generally not subject to kiddie tax rules.
About Ted
Ted Stricker is a partner and financial advisor at Bernath + Rosenberg, a full-service accounting, tax, and wealth management firm with offices in Monsey, NY, Lakewood, NJ, Cedarhurst, NY, and Miami Beach, FL. The firm demonstrates a personalized approach to custom-tailored solutions and an unwavering commitment to client service. With over 27 years of experience in the financial services industry, Ted manages the firm’s wealth management team, and specializes in designing financial plans for business owners and affluent families. Since joining the team in 2015, he provides practical and sound advice, combining independent approaches and solutions that reflect clients’ personality, lifestyle, and goals.
For the ninth year in a row, Bernath + Rosenberg has been named as one of the leading CPA firms in financial planning by Accounting Today, a publication that receives hundreds of submissions each year and features the Top 150 Firms in the nation. Ted is a CERTIFIED FINANCIAL PLANNER® practitioner and is a member of the Financial Planning Association. To learn more about Ted, connect with him on LinkedIn.
Professionals associated with Bernath & Rosenberg P.C. may be either (1) registered representatives with, and securities and advisory services offered through LPL Financial, Member FINRA/SIPC, a registered investment advisor; or (2) solely tax professionals of Bernath & Rosenberg P.C., and not affiliated with LPL Financial. Tax/accounting/CPA related services offered through Bernath & Rosenberg P.C. is a separate legal entity and not affiliated with LPL Financial. LPL Financial does not offer tax advice or Tax/accounting/CPA related services.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax situation with a qualified tax advisor.
