Can I Put My Child on Payroll for My Business?

Employing a child in a family business can be a strategic decision for business owners. This practice is legitimate and offers distinct advantages when structured and managed correctly. Understanding compliance requirements is important for any business considering this option.

Defining Legitimate Employment

Employment must be genuine and meet certain criteria. The child must perform actual, necessary services for the business, just as any unrelated employee would. Tasks should be relevant to the business operations, such as administrative support, website maintenance, social media management, or cleaning the business premises. Paying a child for personal chores unrelated to the business does not qualify as legitimate employment.

The compensation paid to the child must be reasonable for the services performed. Wages should be comparable to what an unrelated individual would earn for similar work. Inflated wages are not permissible and could lead to scrutiny from tax authorities. The Internal Revenue Service (IRS) scrutinizes payments that appear to be for personal benefit rather than for business services.

Age considerations also play a role. The Fair Labor Standards Act (FLSA) generally prohibits non-agricultural employment for children under 14. Children must be capable of performing the assigned work, and the work must not be deemed hazardous for their age group. Federal law allows exceptions for parental businesses, but state labor laws may have additional restrictions that must be followed.

The legal structure of the business significantly impacts tax treatment. If the business is a sole proprietorship or a partnership where each partner is a parent, specific tax exemptions may apply. These payroll tax exemptions generally do not apply if the business is structured as a corporation. This distinction is crucial for understanding the potential tax benefits available to the business.

Setting Up Payroll and Understanding Tax Treatment

Setting up payroll involves several practical steps. The business needs an Employer Identification Number (EIN) if it pays employees. An EIN is a unique nine-digit number assigned by the IRS to identify a business for tax purposes, similar to a Social Security Number for an individual. Applying for an EIN online typically results in immediate receipt of the number.

Once the EIN is established, the child, like any other employee, must complete Form W-4, Employee’s Withholding Certificate. This form provides information for federal income tax withholding. The child will also need to complete Form I-9, Employment Eligibility Verification, which verifies identity and eligibility to work. Employers must examine acceptable documents, such as a Social Security card and a driver’s license, to complete Form I-9 and retain it for a specified period.

Processing payroll involves calculating gross pay, deducting applicable taxes, and arriving at net pay. Detailed records of hours worked and wages paid must be maintained. This meticulous record-keeping is important for substantiating wage payments and deductions.

The wages paid to a child are a deductible business expense for the employer, which can reduce the business’s taxable income. For the child, their earned income is subject to federal income tax, but they can utilize their standard deduction. For the 2025 tax year, a dependent child’s standard deduction is the greater of $1,350 or the sum of $450 plus their earned income, up to the full single filer standard deduction of $15,000. This means a child can earn up to $15,000 in 2025 without owing federal income tax, assuming no other income.

Payments for services performed by a child under the age of 18 for their parent’s sole proprietorship or a partnership in which both parents are partners are exempt from Social Security and Medicare taxes (FICA). This exemption applies to both the employee’s and employer’s share of FICA taxes. Furthermore, these wages are also exempt from Federal Unemployment Tax Act (FUTA) taxes until the child turns 21. However, if the business is a corporation (S-Corp or C-Corp), an estate, or a partnership where not all partners are the child’s parents, these FICA and FUTA exemptions generally do not apply. In such corporate structures, wages paid to a child are subject to FICA and FUTA taxes regardless of age, just like any other employee.

Ensuring Ongoing Compliance and Documentation

Maintaining accurate and comprehensive records is fundamental for ongoing compliance when employing a child. Businesses must keep detailed payroll records, including timesheets or other reliable documentation of hours worked, the wages paid, and any deductions. This also includes retaining the completed Form W-4 and Form I-9 for the required period. These records are essential to demonstrate legitimate employment and to support deductions in the event of a tax inquiry.

Annual reporting obligations are also part of the payroll process. By January 31st of the following year, the business must issue a Form W-2, Wage and Tax Statement, to the child, detailing their earnings and any withheld taxes for the previous calendar year. This W-2 form is necessary for the child to file their personal income tax return. The wages paid to the child are also reported on the business’s tax return. For sole proprietorships, these wages are typically reported as an expense on Schedule C (Form 1040), Profit or Loss from Business. Corporations report employee wages on their respective corporate tax forms, such as Form 1120 for C corporations.

Meticulous record-keeping and adherence to reporting deadlines are important for demonstrating legitimate employment and complying with federal tax laws. Proper documentation ensures the business can substantiate wage payments, tax withholdings, and deductions if audited. This ongoing administrative diligence helps to realize the potential tax benefits of employing a child while avoiding penalties for non-compliance.