Can I Pay My Kids to Work for My Business?

Paying children to work in a family business can be a beneficial arrangement for both the business and the child. This strategy offers opportunities for children to gain work experience and learn financial responsibility. For the business, it can provide a legitimate way to reduce taxable income. Parents considering this option must understand and adhere to specific rules and regulations to ensure the employment arrangement is legitimate for tax purposes.

Establishing Legitimate Employment

For wages paid to a child to be a legitimate business expense, the employment must meet specific criteria. The work performed by the child must be ordinary and necessary for the business’s operation. This means tasks should be those an unrelated employee would perform, such as office work, cleaning, or social media management. The child must genuinely perform these services; simply assigning chores around the house will not qualify.

Compensation paid to the child must be reasonable for the services rendered. The wage should be comparable to what an unrelated individual would be paid for similar work in the same industry and geographic area. Overpaying a child can raise red flags with the Internal Revenue Service (IRS) and may lead to disallowance of the deduction.

Age considerations are important. Federal law does not set a minimum age for children employed by their parents in a parent-owned business (sole proprietorship or partnership). However, federal child labor laws, such as the Fair Labor Standards Act (FLSA), still apply to occupations and working conditions. These laws prohibit children under 16 from working in manufacturing or mining and those under 18 from hazardous occupations. State child labor laws can also impose restrictions on working hours, types of work, and require work permits, so checking state-specific regulations is essential.

A clear employer-employee relationship should be established and maintained. This includes defining job duties, setting work schedules, and documenting hours worked. Treating the child as a formal employee, rather than giving them an allowance, supports the legitimacy of the employment for tax authorities.

Tax Considerations for Your Child’s Wages

Wages paid to a child are taxable income for the child. A child’s standard deduction provides an advantage. For the 2024 tax year, a dependent child’s standard deduction is the greater of $1,300 or their earned income plus $450, up to the basic standard deduction for single filers, which is $14,600. This means a child can earn up to the standard deduction amount without owing federal income tax.

If the child’s gross income exceeds their standard deduction amount, they will need to file a federal income tax return. The child’s earned income is taxed at their own, lower, individual tax rates.

The “kiddie tax” applies to a child’s unearned income, such as interest, dividends, and capital gains from investments. The kiddie tax does not apply to earned income (wages) a child receives from employment. Wages paid to a child are taxed at the child’s individual income tax rate, not the parent’s.

Tax Considerations for Your Business

Legitimate wages paid to a child are a deductible business expense for the parent’s business. This deduction reduces the business’s taxable income, which can lower the overall tax liability for the business owner.

Payroll tax obligations vary by business structure. For sole proprietorships or partnerships where each partner is a parent of the child, payments for services of a child under age 18 are not subject to Social Security and Medicare (FICA) taxes. Wages paid to a child under age 21 in these business structures are exempt from Federal Unemployment Tax Act (FUTA) taxes. These exemptions can result in payroll tax savings.

These payroll tax exemptions do not apply if the business is structured as a corporation (S-Corp or C-Corp), or a partnership that includes non-parent partners. In such cases, the corporation or partnership must withhold and pay FICA and FUTA taxes on the child’s wages, as it would for any other employee, regardless of the child’s age. State income tax withholding and state unemployment insurance (SUI) rules vary by state and may not offer similar family exemptions. Business owners should consult their state’s specific labor and tax regulations to understand all applicable state-level obligations.

Compliance and Record Keeping

Treating a child as a regular employee for payroll purposes is necessary for compliance. This includes maintaining payroll records, tracking hours worked, and issuing regular paychecks. Accurate records substantiate the legitimacy of the employment in the event of an IRS inquiry.

Several forms are required for documentation. The child should complete a Form W-4, Employee’s Withholding Certificate, for federal income tax withholding. The business must ensure a Form I-9, Employment Eligibility Verification, is completed to verify the child’s identity and employment authorization. For minors, a parent or legal guardian can complete Section 1 of Form I-9 on their behalf.

At the end of the year, the business must issue a Form W-2, Wage and Tax Statement, to the child, reporting their annual wages and any withheld taxes. For the business, if it has other employees or if the family employment rules for FICA and FUTA do not apply, it will need to file Form 941, Employer’s Quarterly Federal Tax Return, to report withheld income taxes, Social Security, and Medicare taxes. Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, is required if the business paid at least $1,500 in wages during any calendar quarter or had one or more employees for 20 or more different weeks in the year. If the business qualifies for the FUTA exemption due to the family employment rule, Form 940 might not be required for the child’s wages, but it is still necessary for any other employees.