How Much Can You Pay Your Child for Work?
Legitimately pay your child for work, understand the tax implications for your family, and set them up for financial success.
Paying a child for work within a family business or personal endeavor can offer valuable lessons in financial responsibility while also providing potential tax advantages for the family. This approach involves understanding specific tax rules and labor laws to ensure the arrangement is legitimate and compliant. Properly structured, this can be a beneficial strategy for both the parent’s business and the child’s financial future.
Establishing Legitimate Employment
Establishing a legitimate employment relationship with a child is fundamental for any associated tax benefits. The work performed by the child must be real, necessary, and ordinary for the business or household. This means the child should engage in tasks that genuinely contribute to the business’s operations or household needs, such as administrative duties, website maintenance, cleaning, or social media management. Compensation paid to the child must be reasonable and comparable to what an unrelated individual would receive for similar work in the same industry and geographic area. Paying excessive wages could lead to the Internal Revenue Service (IRS) disallowing the deduction.
Age considerations are important when employing a child, as federal and state labor laws apply. The Fair Labor Standards Act (FLSA) sets 14 years as the minimum age for most non-agricultural employment. Children under 14 are not permitted to work in non-agricultural occupations covered by the FLSA, with exceptions for family businesses where the parent is the sole owner, provided the work is non-hazardous.
For 14- and 15-year-olds, federal law limits work hours to outside school hours, no more than 3 hours on a school day and 18 hours during a school week, and no more than 8 hours on a non-school day and 40 hours during non-school weeks. They also have restrictions on working before 7 a.m. or after 7 p.m., with an extension to 9 p.m. from June 1 through Labor Day. Once a child turns 16, federal law removes hour restrictions for non-hazardous jobs, but hazardous occupations are prohibited for those under 18. If state laws are stricter than federal laws, the stricter standard must be followed.
Tax Implications for Parents and Businesses
Wages paid to a child offer significant tax advantages for parents and their businesses. When employment is legitimate and compensation is reasonable, these wages are deductible as an ordinary and necessary business expense. This deduction reduces the parent’s or business’s taxable income, potentially lowering overall tax liability.
Specific payroll tax exemptions apply. For sole proprietorships or partnerships where each partner is a parent of the child, wages paid to a child under 18 are exempt from Social Security and Medicare taxes (FICA). A more extended exemption applies to Federal Unemployment Tax (FUTA), where wages paid to a child under 21 are exempt from FUTA.
These payroll tax exemptions generally do not apply if the business is incorporated, such as a C corporation or S corporation. In such cases, the child is considered an employee of the corporation, and standard payroll taxes, including FICA and FUTA, must be withheld and paid regardless of the child’s age. However, wages paid to the child remain a deductible business expense, still reducing the parent’s or business’s income tax.
Tax Implications for the Child
Income earned by a child from legitimate employment has specific tax implications. Wages received by the child are considered earned income. A significant portion of this earned income can often be received without federal income tax liability due to the child’s standard deduction. For the 2025 tax year, the standard deduction for a single filer is $15,000. This means a child can earn up to this amount without owing federal income tax, assuming they have no other income.
The “kiddie tax,” which applies to unearned income of children, generally does not apply to earned income from wages. Since the child’s wages are earned income, they are taxed at the child’s own tax rate, which is typically much lower than the parent’s.
Regarding FICA taxes (Social Security and Medicare), a child will owe these taxes if the parent’s business is structured as a corporation, or if the child is above the age threshold for the exemption. For sole proprietorships or partnerships consisting solely of the child’s parents, the child’s wages are exempt from FICA until they turn 18. However, once the child reaches 18, FICA taxes apply.
A child earning income can contribute to a Traditional or Roth IRA. A child can contribute up to their earned income for the year, subject to the annual contribution limits. For 2025, the maximum IRA contribution limit is $7,000. Contributions to a Roth IRA, funded with after-tax dollars, allow for tax-free growth and tax-free withdrawals in retirement, provided certain conditions are met. This provides an opportunity for early retirement savings.
Required Documentation and Payroll
Maintaining accurate documentation is essential when employing a child, ensuring compliance with tax regulations and labor laws. Formalizing the employment relationship with proper records helps substantiate the legitimacy of the wages paid. Records should include a clear job description outlining the child’s responsibilities.
Detailed records of hours worked, such as timesheets, are crucial to support the reasonableness of the compensation. Proof of payment, such as bank transfer records or pay stubs, should also be maintained. The child will need to provide their Social Security Number (SSN) for tax reporting purposes, and the parent will need to complete IRS Form W-4 and USCIS Form I-9, Employment Eligibility Verification.
For businesses structured as sole proprietorships or partnerships where the child’s wages are exempt from FICA and FUTA, formal payroll withholding for these taxes may not be required. However, federal income tax withholding is still expected from the child’s wages, regardless of the business type or the child’s age. Issuing a W-2 at year-end for income reporting is generally required for any employee who receives wages, even if no taxes are withheld due to low income. For corporations or in situations where the exemptions do not apply, standard payroll procedures must be followed, including withholding income tax and FICA, and issuing a W-2.
Paying the child directly into their own bank account is recommended. This demonstrates the child’s ownership and control over their earned funds, supporting the legitimacy of the employment arrangement.