How Much Can I Pay My Minor Child From My Business?

Employing minor children can be a strategic decision for business owners, offering benefits like work experience, financial responsibility, and potential tax advantages for the business and family. Proper structuring is important to ensure compliance with tax regulations and labor laws, requiring an understanding of legitimate employment and tax implications.

Establishing Legitimate Employment

Paying a minor child requires establishing a genuine employer-employee relationship. The Internal Revenue Service (IRS) mandates that the work performed must be an ordinary and necessary business expense. Tasks must be real, performed regularly, and essential to the business. For instance, paying a teenager to manage social media for a consulting business is legitimate.

The child must perform actual, age-appropriate services for the business. Compensation must be reasonable, comparable to what an unrelated third party would be paid for similar work in the same industry. Paying an excessive amount could draw IRS scrutiny.

Parents must treat their child as a formal employee, maintaining proper records and issuing payments. This ensures the arrangement is seen as bona fide employment, substantiating its legitimacy for tax purposes.

Understanding Income Tax Implications

Wages paid to a minor child are considered earned income for federal income tax purposes. A significant benefit arises from the application of the standard deduction. For a dependent child, their earned income up to the standard deduction amount may be received federal income tax-free. For example, in 2024, the standard deduction for a single filer is $14,600, increasing to $15,000 in 2025.

If a child’s earned income does not exceed this standard deduction threshold, they typically will not owe federal income tax. The business, however, can still deduct these wages as a legitimate business expense, which can reduce the parent’s overall taxable income. This strategy effectively shifts income from the parent’s potentially higher tax bracket to the child’s lower, or even zero, tax bracket.

A child is generally required to file a federal income tax return if their earned income exceeds the standard deduction amount. For 2024, this threshold is $14,600. Even if their income is below this, filing a return might be beneficial if federal income tax was withheld from their pay, as they may be due a refund.

Navigating Payroll Tax Exemptions

One of the most compelling reasons for a parent to employ their minor child stems from specific payroll tax exemptions. Wages paid to a child under the age of 18 by a parent in a sole proprietorship or a partnership where both parents are the only partners are exempt from Social Security (FICA) and Medicare taxes. This means neither the employer nor the employee portion of these taxes needs to be paid.

A similar, though more liberal, exemption applies to Federal Unemployment Tax Act (FUTA) taxes. Wages paid to a child under the age of 21 by a parent in a sole proprietorship or a partnership where both parents are the only partners are exempt from FUTA taxes. These exemptions can lead to substantial tax savings for the business.

These payroll tax exemptions generally do not apply if the business is structured as a corporation, or if it is a partnership that includes non-parent partners. In such cases, the child’s wages are typically subject to FICA and FUTA taxes, just like any other employee. Understanding the business entity structure is crucial to determine eligibility for these payroll tax savings.

Complying with Child Labor Regulations

Beyond tax considerations, employing a minor child necessitates adherence to federal and state child labor laws. The Fair Labor Standards Act (FLSA) sets federal standards for minimum age, hours of work, and types of occupations permitted for minors. Generally, the FLSA prohibits employment of children under 16 in non-agricultural occupations and those under 18 in hazardous occupations.

For businesses solely owned by parents, federal child labor rules are more flexible; children of any age can generally work in non-hazardous occupations, with no restrictions on hours or times of day. However, children under 16 cannot be employed in mining or manufacturing. Despite this federal flexibility, state child labor laws often impose additional, sometimes more restrictive, requirements regarding age, work hours, and occupations.

Employers must ensure the work assigned to a minor child is non-hazardous and appropriate for their age. For example, tasks involving dangerous machinery or environments are typically prohibited. Some states may also require work permits for minors, adding another layer of compliance.

Essential Record Keeping

Maintaining thorough and accurate records is fundamental when employing a minor child. These records substantiate the legitimacy of the employment and payments for tax purposes, particularly in the event of an IRS inquiry. Detailed documentation helps demonstrate that the work performed was real and the compensation reasonable.

Records should include a clear job description outlining the child’s responsibilities and duties within the business. Time sheets or logs documenting the hours worked each day and week are also important. Evidence of payment, such as pay stubs, cancelled checks, or bank transfer records, should be meticulously kept.

Documentation of the child’s age, such as a birth certificate or other official identification, should be on file. While not always required, a written employment agreement can further solidify the bona fide nature of the employment relationship. These comprehensive records are crucial for compliance and to support any deductions claimed by the business.