How to Hire Your Child as an Employee and Save on Taxes

You're already spending money on your kids. Baseball registration fees, dance classes, school clothes, summer camp...these expenses add up fast. So, what if you could turn those unavoidable costs into legitimate business deductions AND teach your children valuable work skills?

Here's how to hire your child as an employee and save on taxes. This isn't a complex strategy reserved for wealthy families with trust funds. Small business owners can use this approach to legally shift personal expenses into tax-deductible business costs.

Here's everything you need to know, explained by a tax professional!

What Are the Benefits of Putting Your Child on Payroll?

When you hire your child, you create a legitimate employer-employee relationship. Your child does work for your business and receives wages in return. You deduct those wages as a business expense (up to $15,000 in 2025), reducing your taxable income.

The tax benefits of hiring your child stack up quickly:

• Your child covers their own expenses: Instead of paying for baseball, ballet, school clothes, or summer camp out of pocket, now your child pays for it with income they earned from your business. You're still funding these activities, but now you're doing it through tax-deductible wages.

• You get a business deduction: For the parent, this feels like a write-off because it is. Every dollar you pay your child in wages reduces your business income by one dollar, lowering your federal income tax, self-employment tax (Social Security and Medicare), and Federal Unemployment Tax Act (FUTA) taxes.

• You can fund your child's future: Those wages can go into a Roth IRA in your child's name, building tax-free retirement savings from an early age. You can also establish savings accounts or use this as an opportunity to teach your kids about money management and work ethic.

• You're shifting money you were already spending: This strategy doesn't require you to spend more money on your children. You're shifting dollars you were already spending into a tax deductible category, done legally and cleanly.

Overall, this 100% legal tax loophole is a win for your entire family.

Plus, setting this up isn't as complicated as it might sound. You don't need expensive lawyers, and most small business owners can implement this strategy with basic payroll setup and proper documentation. That said, you WILL benefit from working with a knowledgeable tax professional!

How to Hire Your Kids to Save on Taxes?

Hiring your child as an employee is completely legal and legitimate, but you need to follow IRS requirements. These rules exist to prevent abuse and make sure that your child is doing their work for reasonable compensation.

Business Structure Requirements

You must operate as a sole proprietorship or single-member LLC to qualify for the payroll tax exemption. This structure allows you to hire your children without paying Social Security, Medicare taxes, or unemployment taxes on their wages.

If your business is structured as a partnership, corporation, or multi-member LLC, the payroll taxes kick in immediately. The IRS treats these entities differently because they are separate legal entities from their owners. In a sole proprietorship or single-member LLC, you and your business are essentially the same entity for tax purposes.

Even though you won't owe payroll taxes, you still need to file the required payroll tax forms. This means preparing quarterly 941 forms, annual W-2s for your children, and a W-3 summary form. The forms will show zero tax due, but the IRS needs to see the paperwork.

Age Requirements

Your child must be under 18 years old to qualify for the payroll tax exemption.

Once they turn 18, you'll need to start paying Social Security, Medicare, and unemployment taxes on their wages just like any other employee, so the tax savings will be gone.

Payment Standards

Your child must perform real, age-appropriate work for your business.

You can't just put them on payroll for doing nothing. The work needs to make sense for their age and abilities, and you need to track their hours and tasks just like any other employee.

In other words, you can't pay your 10-year-old $50 per hour to get on calls with your clients, but you can pay them $10-15 per hour for age-appropriate tasks like organizing supplies, basic data entry, or helping with simple office work.

What If You Have an S-Corp?

S-Corp owners can still use this strategy, but they need to set up a separate structure to make it work. You can't hire your children directly through your S-Corp and get the payroll tax exemption.

You'll need to create a DBA sole proprietorship (essentially a family office) to employ your children.

This separate business entity operates as a sole proprietorship, which qualifies for the payroll tax exemption. Your S-Corp can then contract with your family office for services, creating a legitimate business relationship between the two entities.

The same rules apply to this setup. You'll need to track time, pay reasonable wages, file payroll forms, and maintain proper documentation. In exchange, you'll legally avoid Social Security and Medicare taxes and give your child tax-free income.

You can check if the S-Corp structure is worth it for you with ‘Is S-Corp Worth It?’ Calculator! 

Family Business Example

Let's say you run a marketing consulting business as a sole proprietorship. You hire your 14-year-old daughter to organize files and update spreadsheets for $12 per hour, and your 16-year-old son to handle basic graphic design and social media posting for $15 per hour.

Your daughter earns $4,800 and your son earns $7,200 during the year. You deduct $12,000 in wages as a business expense, saving approximately $3,600 in taxes.

In turn, your children use their earnings to pay for school activities and summer programs, which are expenses you were already covering out of pocket.

Both children owe no federal income tax since they earn less than the $15,000 standard deduction (in 2025), and you pay no payroll taxes, converting $12,000 of personal expenses into tax deductions.

Family Employees Mistakes to Avoid

Here are a few common mistakes that can trigger IRS scrutiny and increase your tax liability:

• Paying unreasonable wages for age and work performed: Your 12-year-old can't earn $150 per hour for simple filing tasks. Pay rates need to match both the complexity of the work and what you'd pay an unrelated person for similar tasks.

• Failing to document: You need proof that your children are doing real work and not just collecting paychecks. Keep detailed time sheets showing when they worked and what tasks they completed, which you'll need to show IRS if they decide to audit you.

• Missing required payroll filings: Even though you won't owe payroll taxes, you must still file quarterly 941 forms, issue W-2s to your children, and submit a W-3 summary form.

• Using personal funds instead of business accounts. Wages must come from your business bank account and go directly into accounts in your children's names. Don't pay them cash from your wallet!

If you need guidance on how to structure your business in the most beneficial way for taxes, book a discovery call with us!

FAQs

What Age Can You Put Your Child on Payroll?

You can put your child on payroll at any age as long as they can perform age-appropriate work tasks. There's no minimum age requirement from the IRS perspective. That said, it'd likely be unreasonable to put your 2-year-old to work.

The payroll tax exemption only applies to children under 18 years old. Once your child turns 18, you'll need to start paying Social Security, Medicare, and unemployment taxes on their wages just like any other employee.

Can You Put a 3-Year Old on Payroll?

Technically yes, but practically it's challenging to justify. A 3-year-old would need to perform legitimate work tasks that provide value to your business. There are not that many legitimate business tasks that a 3-year-old can reasonably accomplish. We recommend waiting until your children are at least 7-10 years old when they can handle more substantial and clearly defined work tasks.

Can I Pay My Child for Work?

Yes! However, the payment must be reasonable compensation for the work that your child does. You can't pay them $200 per hour for organizing office supplies. You'll also need to maintain a formal employer-employee relationship, which means tracking hours, documenting tasks, and paying from your business accounts into your child's bank account.

Get Clarity During Tax Season with Desi Tax

Hiring your children is just one strategy for reducing your tax burden as a business owner. There are dozens of other legitimate deductions, credits, and tax planning opportunities you might be missing!

Tax planning shouldn't be a once-a-year scramble during filing season. Learn more about our tax planning & bookkeeping services to take full advantage of every legal strategy available!