Can You Put Your Child on Your Business Payroll?

Employing your child in a business can offer benefits for both the business and the child. This arrangement allows a child to gain valuable work experience and earn income, while potentially providing the business with a tax-deductible expense. Understanding the specific requirements and implications is important to ensure compliance with tax laws and labor regulations.

Hiring Requirements for Children

For a child’s employment to be considered legitimate by tax authorities, the work performed must be real and necessary for the business operation. The child must perform actual services that would otherwise be done by another employee. Examples include administrative support, website maintenance, social media management, cleaning, or inventory assistance.

Compensation paid to the child must be reasonable and comparable to what an unrelated employee would earn for similar work, skills, and responsibilities. Document how the compensation was determined, based on market rates for the specific job.

Age considerations are important due to child labor laws. Federal law generally sets 14 years as the minimum age for non-agricultural employment, with restrictions on hours and types of work for those under 16. Exceptions exist for children working in businesses entirely owned by their parents, where they can generally work at any age, provided the work is not in mining, manufacturing (for those under 16), or deemed hazardous (for those under 18). State child labor laws can vary and may impose stricter requirements regarding working hours, permissible occupations, and age limits.

Maintaining clear and accurate records is important to substantiate the legitimacy of the employment. This includes detailed job descriptions, regular work logs or timesheets to record hours worked, and evidence of work product.

Tax Treatment for Businesses and Children

Wages paid to a child for legitimate services are a deductible business expense, which can reduce the business’s taxable income. This deduction is available to both incorporated and unincorporated businesses.

For the child, earned income is taxed differently from unearned income. The “kiddie tax” rules, designed to prevent income shifting from investments, apply only to unearned income like dividends or capital gains, not to wages earned from employment. A child’s earned income is subject to their own income tax rates. For 2025, a dependent child’s standard deduction is the greater of $1,350 or their earned income plus $450, up to a maximum of $15,750 (the standard deduction for single filers). If the child’s earned income falls below this standard deduction amount, they may owe little to no federal income tax.

Payroll tax treatment varies significantly based on the 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 generally exempt from Social Security and Medicare taxes (FICA). Wages paid to a child under age 21 in these business structures are also exempt from Federal Unemployment Tax Act (FUTA) taxes.

These FICA and FUTA exemptions generally do not apply when a child is employed by a corporation, including S-corporations and C-corporations. In such cases, children employed by corporations are subject to the same payroll taxes as any other employee. Similarly, if the business is a partnership that includes partners who are not parents of the child, the FICA and FUTA exemptions do not apply.

While federal rules provide certain exemptions, state income tax and state unemployment tax rules can differ and may not mirror federal exemptions. Business owners should consult their state’s department of labor and revenue to understand specific state-level requirements and potential tax liabilities.

A child’s earned income from employment also makes them eligible to contribute to a Roth IRA or traditional IRA. For 2025, an individual can contribute up to $7,000 to an IRA, or up to $8,000 if they are age 50 or older. The child’s contribution cannot exceed their total earned income for the year.

Payroll Setup and Ongoing Compliance

To establish a child on the payroll, the child must have a Social Security Number (SSN). The child will also need to complete Form W-4, Employee’s Withholding Certificate, which provides the employer with information to calculate the correct federal income tax withholding from their wages.

Payroll processing involves calculating wages based on hours worked and the agreed-upon pay rate, and then making timely payments. This can be done via direct deposit or check, following a regular pay schedule consistent with other employees.

Meticulous recordkeeping is important for ongoing compliance and to support the employment in case of an audit. This includes maintaining detailed timesheets, copies of job descriptions, pay stubs, and records of all wage payments.

At year-end, the business is required to issue a Form W-2, Wage and Tax Statement, to the child. This form reports the total wages paid and any taxes withheld during the year. The business also has obligations to file necessary payroll tax forms with federal agencies, such as Form 941 and Form 940, if applicable. Businesses must also comply with state-specific payroll requirements, including state income tax withholding and state unemployment insurance contributions, where applicable.