Hiring Your Children: Tax Benefits of Employing Kids in a Family Business

Sole proprietors and single-member LLCs (treated as disregarded entities) can hire their children under age 18 and the wages are exempt from Social Security and Medicare taxes (FICA) under IRC 3121(b)(3)(A). The wages are also exempt from FUTA (federal unemployment tax) if the child is under age 21 under IRC 3306(c)(5). The child can earn up to the standard deduction amount ($15,350 in 2025) with zero federal income tax because the standard deduction wipes out the taxable income.

What work can children do?

The work must be legitimate, age-appropriate, and something the business actually needs done. Common jobs for children in family businesses:

• Ages 7-12: Cleaning the office, organizing files, shredding documents, stuffing envelopes, stocking supplies, labeling packages, simple data entry
• Ages 13-15: Filing, answering phones, social media content creation, inventory management, basic computer work, customer greeting
• Ages 16-17: Administrative assistance, bookkeeping entries, customer service, marketing, photography, website updates

The key documentation: keep time sheets (date, hours, tasks performed), pay the child by check or direct deposit (not cash), and keep the wages consistent with what you would pay an unrelated person for the same work.

What does it look like with multiple children?

The most important requirement is that the work is real and the pay is reasonable. The IRS has disallowed deductions where children were “employed” but had no documented duties, no time records, and no evidence of actual work performed. Courts look for the same evidence they would in any employer-employee relationship: time sheets, job descriptions, and output consistent with the hours claimed.

What about S-Corps and partnerships?

The FICA exemption under IRC 3121(b)(3)(A) applies ONLY to services performed for a sole proprietorship (or single-member LLC) owned by the child’s parent. If the business is an S-Corp, the child’s wages are subject to FICA like any other employee’s wages.

The workaround: Some business owners create a sole proprietorship management company that employs the children and provides management services to the S-Corp. The sole proprietorship pays the children (FICA-exempt) and bills the S-Corp for the services. This structure must have economic substance and a legitimate business purpose. The management company must do real work, charge fair-market rates, and operate as a genuine business. Poorly executed versions of this structure have been challenged by the IRS.

The simpler and safer approach for S-Corp owners: hire the child as a regular W-2 employee of the S-Corp. FICA applies, but the wages are still a deductible business expense, and the child’s income is taxed at the child’s lower rate. The total tax savings are smaller than the sole proprietorship approach but still meaningful.

Related guides:

• Hiring Family Members in Your Small Business: Tax Strategies and Rules

• Hiring Your Children: Tax-Free Income, FICA Exemption, and the Sole Proprietorship Advantage

• Employing Family Members: Tax Benefits, FICA Exemptions, and IRS Compliance for Family Businesses

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.