How Much Can You Pay Your Child to Work For You?
Navigate the rules for legitimately employing your child in your business, unlocking potential tax benefits for your family.
Business owners, including sole proprietors, often hire their children to work within their operations. This arrangement offers advantages for both the business and the child. Understanding the regulations governing such employment ensures compliance and potential financial benefits. These rules cover the employment relationship, wage considerations, and tax implications for both the business and the child.
Establishing a Legitimate Employment Relationship
For the employment of a child to be recognized for tax and legal purposes, it must represent a genuine employer-employee relationship. This means the child must perform actual, necessary services for the business, comparable to tasks an unrelated employee would undertake.
A clear job description outlining the child’s duties is important, and compensation should be regular and consistent with services rendered, not an arbitrary gift. Wages paid must be reasonable for the work performed, considering the nature of tasks, the child’s experience, and what non-family employees would earn for similar responsibilities. Paying an unrealistic wage could draw scrutiny. Maintaining thorough records, such as timesheets, job descriptions, and payroll records, helps substantiate employment legitimacy.
Wage and Hour Considerations
When employing a child, federal and state wage and hour laws apply. The Fair Labor Standards Act (FLSA) generally exempts children under 16 from federal minimum wage and overtime requirements if they work in a non-agricultural business solely owned by their parents. This exemption means parents in unincorporated businesses can often pay their child less than the federal minimum wage without violating FLSA, though state laws may differ.
Regardless of parental ownership, child labor laws still apply, governing age restrictions, hours worked, and permissible types of work. For instance, children under 18 cannot be employed in hazardous occupations, and those under 16 have limitations on working hours and types of work. Accurate record-keeping of hours worked remains important for justifying compensation, even when wage exemptions apply.
Tax Responsibilities for the Business
Wages paid to a child, when legitimate and reasonable, are generally a deductible business expense, reducing the business’s taxable income. Exemptions exist for Social Security and Medicare taxes (FICA) and Federal Unemployment Tax (FUTA) when a child is employed by a parent in an unincorporated business (e.g., sole proprietorship or partnership where both parents are partners). Specifically, payments to a child under age 18 are not subject to FICA taxes, and payments to a child under age 21 are not subject to FUTA tax.
These payroll tax exemptions do not apply if the business is structured as a corporation or if the child reaches the specified age thresholds. In such cases, the business must withhold and pay FICA and FUTA taxes. Federal income tax withholding from the child’s wages is required if their earnings exceed the standard deduction or other applicable thresholds, and the business must issue a Form W-2 to the child.
Tax Implications for the Child
The wages a child earns from working for a parent’s business are considered taxable income to the child. However, a child’s earned income may fall below the standard deduction threshold, meaning they might not owe federal income tax. For 2025, the standard deduction for a single filer is $15,750. If a child’s earned income does not exceed this amount, they may not be required to file a federal income tax return.
The child’s earnings can also be used to contribute to a Roth IRA, which offers a long-term savings opportunity. A child can contribute up to the annual limit, which is $7,000 for 2025, or their total earned income for the year, whichever is less. Contributions to a Roth IRA are made with after-tax dollars, allowing for tax-free withdrawals in retirement. This strategy allows for early retirement savings and the potential for significant tax-free growth over decades. State income tax rules vary and may also apply to the child’s earnings.