If your child performs legitimate work, receives reasonable compensation, and is paid through a properly documented payroll process, their wages are generally deductible as a business expense. This can lower your business's taxable income while providing your child with earned income to save or invest.

However, your business structure matters.

For sole proprietorships and certain LLCs taxed as sole proprietorships, children under age 18 may qualify for exemptions from Social Security and Medicare taxes, and children under age 21 may also be exempt from federal unemployment tax. These benefits can make hiring your child particularly tax efficient.

By contrast, if your business operates as an S corporation or C corporation, wages paid to your child are generally subject to the same payroll taxes as any other employee. Although the wages remain deductible to the business, the payroll tax advantages available to sole proprietors typically do not apply.

Regardless of your entity type, the IRS expects the arrangement to reflect a genuine employment relationship. Your child should perform real, age appropriate work, receive reasonable compensation for the services provided, maintain time records when appropriate, and be paid through your normal payroll system. Good documentation is essential.

Every family's situation is different. Factors such as your child's age, your business structure, state employment laws, and your long term tax strategy all influence whether this approach makes sense.

Before implementing this strategy, consult with your tax advisor to ensure it aligns with current IRS rules and your overall financial objectives. At The Accountancy, we help business owners evaluate these opportunities and implement them correctly, so they maximize available tax benefits while remaining fully compliant.

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