How to Put Your Child on the Payroll

Employing a child in a family business offers distinct advantages for business owners. This strategy provides valuable work experience for the child while potentially offering financial benefits to the business. Navigating the process requires careful attention to legal and tax requirements to ensure compliance and maximize potential advantages.

Establishing Legitimate Employment

Legitimate employment requires certain criteria. The child must perform actual, necessary, and ordinary services for the business, similar to any other employee. This means the work must be a real job contributing to operations, such as administrative tasks, website management, or cleaning. Paying a child without genuine work can lead to IRS scrutiny.

Compensation paid to the child must be reasonable for services rendered, aligning with what an unrelated employee would earn for similar work. Overpaying a child solely to shift income could be flagged by the IRS. For instance, a young child performing light office duties would not realistically earn a high hourly wage, but an older teenager developing a website might justify a higher rate. While federal law sets a minimum age of 14 for most non-agricultural employment, exceptions exist for children working in parent-owned businesses with no federal minimum age. State child labor laws vary and may impose their own minimum age and hour restrictions, with the more protective law applying.

Documenting work performed substantiates employment legitimacy. Maintaining records such as timesheets, job descriptions, and proof of payment (e.g., checks, direct deposit records) helps demonstrate the child’s bona fide employment and supports the reasonableness of compensation. The child’s Social Security number is also required for payroll and tax purposes.

Understanding Tax Implications

Hiring a child affects the tax obligations of both the business and the child. Wages paid to the child are subject to federal income tax, like any other employee’s earnings. However, a child may have little to no federal income tax liability due to the standard deduction, which can offset a substantial portion of their earnings. For example, for the 2025 tax year, if a child’s earned income does not exceed the standard deduction amount, they may not owe federal income tax.

Exemptions apply to Social Security and Medicare taxes (FICA) and Federal Unemployment Tax Act (FUTA) taxes. If the business is a sole proprietorship or a partnership where the only partners are the child’s parents, wages paid to a child under age 18 are exempt from FICA taxes. This exemption means neither the employer nor the child pays Social Security or Medicare tax on those wages. Wages paid to a child under age 21 by their parent(s) in such unincorporated businesses are also exempt from FUTA taxes. This FUTA exemption does not apply once the child turns 21.

These FICA and FUTA exemptions do not apply if the business is incorporated (e.g., C corporation or S corporation). In an incorporated business structure, wages paid to a child, regardless of age, are subject to FICA and FUTA taxes. State unemployment tax rules may differ from federal guidelines, and some states might not offer the same exemptions for family employment, requiring employers to check state-specific regulations. From the business’s perspective, the wages paid to the child are a deductible business expense, which reduces the business’s taxable income.

Setting Up Payroll and Compliance

Before a child is placed on payroll, several setup and compliance steps are required. The business must have an Employer Identification Number (EIN), a federal tax ID for reporting wages and tax activities. An EIN can be obtained for free directly from the IRS, typically online with immediate issuance.

Once the EIN is secured, the employer needs a payroll processing system, ranging from manual calculations to dedicated software or professional services. Each child employee must complete Form W-4, Employee’s Withholding Certificate, to determine federal income tax withholding. This form requires the child’s personal information and withholding selections.

In addition to tax forms, employers must complete Form I-9, Employment Eligibility Verification, for each new hire. This form verifies identity and legal authorization to work in the United States. Acceptable Form I-9 documents include a U.S. passport, permanent resident card, or a combination of a driver’s license and Social Security card. Employers are required to report new hires to state agencies within a specific timeframe, typically within 20 days of hire, though some states may have shorter deadlines. New hire reporting includes the employee’s name, address, Social Security number, and date of hire, along with the employer’s name, address, and EIN.

Running Payroll and Filing Requirements

After setup, running payroll involves calculating pay, withholding taxes, and fulfilling filing obligations. Each pay period, the employer calculates the child’s gross pay based on hours worked and agreed-upon wages. Applicable tax exemptions and withholdings are then applied to determine net pay. Wages can be issued via check or direct deposit.

Businesses subject to federal income tax withholding or FICA taxes must deposit these taxes with the IRS. The deposit schedule (e.g., monthly or semi-weekly) depends on total tax liability. Failure to deposit taxes on time can result in penalties. Annually, employers must issue Form W-2, Wage and Tax Statement, to each employee by January 31 of the following year. This form reports total wages paid and taxes withheld. Copies of Form W-2 are also sent to the Social Security Administration.

Federal payroll tax forms, such as Form 941, Employer’s Quarterly Federal Tax Return, must be filed quarterly to report withheld federal income tax and FICA taxes. Form 941 due dates are generally April 30, July 31, October 31, and January 31 for the respective quarters, with a 10-day extension if taxes were deposited on time. Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, is filed annually by January 31 to report FUTA taxes. If FUTA taxes were deposited on time, the filing deadline extends to February 10. State and local payroll tax forms may also be required, depending on business location.

Maintaining Records

Maintaining accurate and comprehensive records demonstrates compliance and facilitates potential audits when employing a child. Employers must keep various documents related to the child’s employment. This includes completed Forms W-4 and I-9, which verify withholding information and employment eligibility.

Detailed payroll records, such as timesheets or work logs, document hours worked and services performed. Records of gross pay, net pay, and deductions for each pay period should also be maintained, along with proof of wage payments like canceled checks or direct deposit confirmations. Copies of filed tax forms, including Forms W-2, 941, and 940, must be retained.

The IRS requires employment tax records to be kept for at least four years after the tax becomes due or is paid, whichever is later. Other federal agencies, such as the Department of Labor, may have different retention periods for wage and hour records, typically three years.