Hiring Your Child: Family Business Payroll
Which payroll taxes apply when you hire your own child, how your entity type changes the answer, and the records that make the wages hold up.
Payslip44
Paystub Generator
Make the paystub on your phone
Payslip44 builds itemized paystubs you can share as a PDF.
Free · No sign-up needed
Everything below covers federal rules only. State income tax, state unemployment insurance, and state child labor law each run on their own rules and can be stricter. This is general information, not tax or legal advice, so talk to a CPA who knows your entity type and your state before you cut the first check.
You have probably heard the pitch. Put your kid on payroll, the business deducts the wages, and the child owes little or no federal income tax on the first slice of earnings because of the standard deduction. The deduction is real. The payroll tax exemptions are real.
What nobody tells you is that all of it rests on paperwork you have to create as you go. The IRS audits records, not intentions, and in a family payroll case the record that carries the most weight is the pay stub.
Who counts as a “child” on your payroll (and who doesn’t)
The exemptions attach to a specific relationship: your own child or stepchild, working for a business you own. A grandchild, a niece, a nephew, or a family friend’s teenager is an ordinary employee. Same payroll taxes as anyone else you hire.
The child also has to be an employee, on a W-2. Paying a child as a contractor is the expensive mistake in this area. It throws away the family exemption and hands the child self-employment tax at 15.3% on 92.35% of net earnings, with a filing requirement once net earnings reach $400. That is worse than just running normal payroll. If the classification question is new to you, W-2 vs 1099 vs statutory vs owner walks through where the lines sit.
Then there is the work itself. The job has to be a real job in your trade or business: filing, data entry, sorting inventory, shooting product photos, sweeping the shop, handing out flyers. Loading the family dishwasher is not payroll. It is a chore, and calling it employment is a fast way to lose the deduction.
The entity test: why a sole proprietorship and an S corp run different payroll
The same child, doing the same job, at the same wage, is taxed differently depending on how the parent’s business is organized. That catches people off guard.
| How your business is organized | Social Security and Medicare | FUTA |
|---|---|---|
| Sole proprietorship | Exempt while the child is under 18 | Exempt while the child is under 21 |
| Single-member LLC treated as a disregarded entity | Exempt while under 18 | Exempt while under 21 |
| Partnership where every partner is a parent of that child | Exempt while under 18 | Exempt while under 21 |
| Partnership with any partner who is not a parent of the child | Applies at every age | Applies |
| C corporation or S corporation | Applies at every age | Applies |
| An estate, including a parent’s estate | Applies at every age | Applies |
Federal income tax withholding is missing from that table on purpose. Wages your child earns in your trade or business are subject to it in every row, at every age.
The exemption removes 7.65% from the employee side (6.2% Social Security plus 1.45% Medicare) and the same 7.65% from your side as the employer, per the rates in IRS Publication 15. Our FICA tax calculator will show you what that looks like on a specific wage figure.
Incorporate, and it vanishes the day the election takes effect. The child’s job is identical either way. The entity is what moved.
The 18th birthday is a mid-year payroll change
Publication 15 covers “a child under age 18,” and its summary table is blunter: exempt until age 18. The trigger is the birthday, not the start of the tax year.
That makes the year your child turns 18 a split year on the payroll. Work before the birthday stays outside Social Security and Medicare; work from the birthday forward is inside. The stub gains two lines mid-year, and the W-2 ends up showing a full year of wages in Box 1 against a partial year of Social Security and Medicare wages. Put the date on your payroll calendar rather than reconstructing the split in January.
About the family management company
If you run an S corp, someone has probably pitched you a “family management company”: an unincorporated entity that employs the kids and bills the S corp a management fee, restoring the under-18 exemption.
The structure exists and it is not automatically abusive. It does need a genuine business purpose, a defensible fee, and its own set of books. That is a conversation with your CPA, not something to set up because a blog post described it in four sentences. If you are already navigating S corp payroll mechanics, the S corp owner pay stub covers the reasonable-compensation side of the same house.
Which family relationship changes the withholding
Children are one of five family situations with their own payroll treatment. Most articles cover the first row and stop, which leaves home-based businesses in particular guessing.
| Family employee | Social Security and Medicare | FUTA | Federal income tax withholding | Condition |
|---|---|---|---|---|
| Your child, under 18 | Exempt | Exempt | Applies | A sole proprietorship, or a partnership in which every partner is a parent |
| Your child, 18 through 20 | Applies | Exempt | Applies | FUTA relief still requires the sole proprietorship or parents-only partnership |
| Your child under 21, doing domestic work in your home | Exempt | Exempt | Not required for household work unless you both agree to it | A separate, broader rule than the business one |
| Your spouse | Applies | Exempt | Applies | FUTA relief only when the business is your sole proprietorship |
| Your parent | Applies | Exempt | Applies | Household work for you sits outside FICA unless a narrow set of conditions applies |
The third row is the one people miss. Domestic work performed in the parent’s private home by a child under 21 sits outside both FICA and FUTA, and it stays that way until 21 rather than 18. If your office is a room in your house and your teenager cleans the house, those two facts pull in different directions and you need to be honest about which one you are paying for. The household employee pay stub guide and the nanny tax calculator both live on the household side of that line.
What your child is legally allowed to do
Payroll tax is only half the question. Labor law is the half that can actually get you fined, and it has nothing to do with the IRS.
The Fair Labor Standards Act carves out a parental exemption: children of any age may generally work for a business owned entirely by their parents. “Entirely” is load-bearing. Bring in one outside partner or shareholder and the exemption is gone.
Two limits survive the exemption anyway. Under-16s may never work in mining or manufacturing. And nobody under 18 may work in any of the 17 occupations the Secretary of Labor has declared hazardous, a list that covers driving, most power-driven machinery, roofing, logging, and explosives. There is no parental override on that list. See the Department of Labor’s Fact Sheet #43 for the current text.
If your business is not solely parent-owned, the ordinary limits for 14 and 15 year olds apply: 3 hours on a school day, 18 hours in a school week, 8 hours on a non-school day, 40 hours in a non-school week, and only between 7 a.m. and 7 p.m. (extended to 9 p.m. from June 1 through Labor Day).
Farms are broader. Youths of any age may work at any time in any job on a farm owned or operated by their parents, per Fact Sheet #40.
State law frequently sets stricter hours, requires work permits, or both. Check yours before you build a schedule around the federal minimums.
The reasonable-wage test, and the records behind it
“How much can I pay my child” is the most-asked question here, and the answer is a method rather than a number.
In Eller v. Commissioner, 77 T.C. 934 (1981), the Tax Court allowed a couple to deduct wages paid to children aged 7, 11, and 12 for pool maintenance, landscaping, cleaning, and light office work at the family’s properties. The court did not reject the arrangement. It cut the amounts down to what those particular tasks were worth from those particular kids.
So the test is comparability. What would you pay an unrelated person, in your market, for this task at this skill level? Pay that, write down why you picked it, and let the hours do the rest.
The five patterns that have been used against taxpayers in this area are worth memorizing, because each one has an obvious fix:
| The pattern | What fixes it |
|---|---|
| No employment tax filings for the child | File the returns and issue the W-2 |
| A flat annual number decided in January | Pay an hourly rate against recorded hours |
| Payment dates and amounts that don’t track the hours | Pay on your normal payroll schedule |
| No record of hours worked at all | Keep a timesheet as the work happens |
| Paying for routine family chores | Pay only for work in the business |
Notice that four of the five are fixed by the same three artifacts: a timesheet, a stub per pay period, and a W-2 in January.
Running the payroll: timesheet, pay stub, W-2
The whole sequence, in order.
- Collect a Form W-4 from your child before the first payday, same as any hire.
- File your state new-hire report. Family members are not exempt from it.
- Make sure your EIN and payroll registrations are in place if this is your first employee.
- Keep a contemporaneous timesheet: dates, start and stop times, and what was done. Written as the work happens, not reconstructed in December.
- Pay on a real schedule, by check or transfer into an account in the child’s name. Cash is legal and it is also unverifiable, which defeats the point.
- Issue a pay stub every pay period showing hours, rate, gross, the federal withholding line, and net pay.
- File the W-2, with the employee copy out by January 31.
Step six is where this post started. A stub for a FICA-exempt child looks different from an ordinary one, and the difference is the evidence. Hours times rate gives you gross. A federal income tax withholding line follows. Then net. There is no Social Security line and no Medicare line, because of the entity and the age, and that absence is exactly what an examiner needs to see was deliberate rather than an oversight.
That shape is what Payslip44 was built for. Save the business as an employer once, save the child as a W-2 employee once, and each pay period becomes hours times rate with the withholding line and nothing else. The year-to-date columns carry the running earnings total, so you can see where the child stands against the $16,100 standard deduction ceiling for 2026 without opening a spreadsheet, and the PDF and CSV exports go straight to your bookkeeper. If you are starting from scratch, how to make a pay stub covers the mechanics, and pay stub requirements by state tells you whether yours mandates a wage statement.
For seasonal help, which is what most of these arrangements really are, the seasonal and part-time pay stub guide covers the pay-period edge cases, and the hourly to paystub earnings calculator handles the arithmetic for irregular weeks.
What happens to the money afterward
Two things are worth knowing, and neither should drive the decision.
The kiddie tax does not reach earned income. Wages are taxed at the child’s own rate, not yours, and the kiddie tax rules apply to unearned income like interest and dividends.
Earned income also makes the child eligible to fund a Roth IRA, up to the lesser of their earnings for the year and the annual IRA limit of $7,500 for 2026. A dependent’s standard deduction runs on its own formula rather than the flat single amount, but for a child whose income is all wages it works out to cover those wages up to that same $16,100 ceiling. Unearned income changes the arithmetic, so ask your CPA if the child has any.
Both of those are nice. Neither is a reason to invent a job that does not exist. The order runs the other way: real work, then real hours, then real payroll, and the tax treatment is whatever falls out at the end.
If you want the employer-side arithmetic before committing to a wage, the employer payroll cost calculator totals what a hire actually costs you, exemptions included.
Payslip44
Paystub Generator
Build a clean, itemized paystub
Payslip44 keeps your employers and employees on file, so each new stub is mostly picking who it's for and filling in the pay.
Free · No sign-up needed
Frequently Asked Questions
Do I have to withhold taxes when I hire my child?
Federal income tax withholding applies to a child's business wages at any age. Social Security and Medicare apply only if the business is incorporated or the child has turned 18.
At what age does my child's pay become subject to Social Security and Medicare?
At 18. Publication 15 exempts the wages only while the child is under age 18, so Social Security and Medicare start applying to work performed from the 18th birthday onward. Paychecks earlier in the same year stay exempt.
Does the FICA exemption apply if my business is an S corp?
No. The exemption covers sole proprietorships, single-member LLCs treated as disregarded entities, and partnerships in which every partner is a parent of the child. A corporation of any kind pays Social Security and Medicare on a child's wages at every age.
How much can I pay my child?
Whatever the work is genuinely worth, measured by what you would pay an unrelated person for the same task in your market. There is no IRS dollar cap. A round annual figure that has no relationship to hours worked is one of the patterns courts have used to cut a deduction.
Does my child need a pay stub?
No federal law requires one, but a stub for each pay period showing hours, rate, gross, withholding, and net is the cleanest proof that pay tracked hours. Most states require a wage statement for employees anyway, and family members are not carved out.
Should I pay my child on a 1099 instead?
No. Contractor treatment forfeits the family exemption entirely and exposes the child to self-employment tax at 15.3% on 92.35% of net earnings, with a filing requirement once net earnings reach $400.
Can my child contribute to a Roth IRA with these wages?
Yes. W-2 wages are earned income, so the child can contribute up to the lesser of their earnings for the year and the annual IRA limit, which is $7,500 for 2026. The cash itself can come from anyone.
Do the same rules apply to my grandchild, niece, or nephew?
No. The family employment exemptions apply to your own child or stepchild working for you. Every other relative is an ordinary employee for payroll purposes.