Can I Deduct Wages Paid to My Child? + FAQs

Yes – wages paid to your child for legitimate work are generally tax-deductible, as long as you follow key IRS rules (real work, reasonable pay, proper records) and use the right business setup.

Tax-savvy business owners are using this little-known strategy to keep income in the family and out of Uncle Sam’s hands. For example, with the standard deduction around $13,850 in 2023, your child can earn that much tax-free – potentially saving you over $2,000 (or more) in taxes each year. This guide breaks down exactly how it works and how to do it the right way.

💰 Instant Tax Write-Off: Wages you pay your child can be deducted as a business expense, immediately lowering your taxable business income (and saving you money at tax time).
🛡️ Payroll Tax Loophole: Sole proprietors and parent-only partnerships skip Social Security & Medicare taxes on a child’s wages if they’re under 18 – a legal tax break not available with other employees.
📈 $0 Tax for Junior: Your child can earn up to the standard deduction amount (around $13k+ per year) and owe zero federal income tax on it – keeping that income in the family tax-free.
📋 IRS-Approved (If You Do It Right): The IRS allows this strategy, but you must treat your child like a real employee: age-appropriate duties, fair market pay, timesheets, and proper payroll paperwork (W-2, etc.).
🤓 Extra Perks: Those wages can double as a funding source for your child’s college fund or Roth IRA. Plus, you’re instilling work ethic and financial skills, all while saving on taxes.

The Direct Answer: Can I Deduct Wages Paid to My Child?

In short, yes. If you own a business, the wages you pay your child can be deducted as a business expense on your taxes – just like paying any other employee. The IRS treats these wages as an “ordinary and necessary” business expense (as long as your child is doing real work that helps the business). This means you subtract the amount you pay them from your business income, reducing your taxable profit.

However, there are critical caveats to get this deduction right. You must actually employ your child in the business (no paying them for mere household chores or for doing nothing). The pay needs to be reasonable for the work (you can’t pay your 10-year-old $50,000 a year for occasionally emptying trash cans). And you have to follow through with normal employer duties: time sheets, payroll records, and obeying child labor laws.

When done correctly, wages to your child are fully deductible and can significantly cut your tax bill. The income effectively shifts from your higher tax bracket to your child’s low (or 0%) tax bracket. It’s a perfectly legal income-splitting strategy – with the blessing of the IRS – as long as all the rules are respected.

Avoid These Tax Traps

If you decide to put your child on the payroll, steer clear of these common tax traps and mistakes that could nullify your deduction or raise red flags:

❌ Paying for Personal Chores: Don’t try to deduct payments for tasks not related to the business. For example, paying your child to clean their room or mow the lawn at home isn’t a business expense. Make sure the work you pay them for directly benefits the business (filing documents, helping on job sites, acting as a model in your advertisements, etc.).
❌ Under-the-Table Payments: Avoid paying your child in cash without records or via perks (like “wages” in the form of pizza or toys). The IRS expects to see actual wages paid (by check, direct deposit, etc.) and proper payroll records. Always document hours worked, tasks completed, and issue a paycheck stub or record.
❌ Unreasonable High Wages: Don’t overpay your child far beyond market rate. Excessive wages for minimal work will look suspicious. Pay them what you’d pay a non-family employee for the same duties. (If your 12-year-old is doing basic filing 5 hours a week, paying them $30/hour would be hard to justify. $10–$15/hour might be more reasonable, depending on your locale and the task.)
❌ Skipping Forms and Withholding: A big mistake is failing to do the paperwork. Even if it’s your kid, you must file payroll tax forms. That means having them fill out Form W-4, keeping an I-9 on file (to verify they’re legally allowed to work in the US), and issuing them a W-2 at year-end. Also, withhold income tax from their paychecks unless they qualify to claim exemption. Not filing required forms or paying payroll taxes due can lead to penalties and a disallowed deduction.
❌ Ignoring Child Labor Laws: Just because you’re the parent doesn’t mean you can ignore labor laws. Avoid violating federal or state rules on hours and work conditions for minors. For instance, don’t make your 13-year-old work late on a school night or do hazardous tasks. If your state requires a work permit for minors, get one. Violating labor laws could not only cause legal trouble but also jeopardize your wage deduction if authorities determine the employment was not legitimate.
❌ Misclassifying the Child as Contractor: Don’t try to issue a 1099 form to avoid payroll. Your child working in your business should almost always be treated as an employee, not an independent contractor. Misclassifying to skip taxes can backfire – the IRS can disallow the arrangement and impose penalties. Put them on official payroll as an employee, which strengthens your case that this is a bona fide business expense.

Staying vigilant about these potential pitfalls will keep your tax-saving strategy solid. In summary: treat it like a real job. Document everything, pay a reasonable wage via proper channels, and follow the same rules you would for any other employee. This will keep the IRS happy and your deduction safe.

Real-World Examples That Actually Work

Sometimes the best way to understand a tax strategy is to see it in action. Here are a few real-world scenarios where hiring a child paid off (literally) and stayed within the law:

Example 1: The Family Retail Business
Jane owns a small boutique (a sole proprietorship) and hires her 15-year-old son, Alex, to manage inventory and run the social media account. She pays him $500 a month for a few hours of work each week. Over the year, Alex earns $6,000. Jane deducts $6,000 as a business expense on her Schedule C, directly reducing her taxable income. In her 22% tax bracket, that saves her about $1,320 in federal income tax. Because Alex is under 18 and she’s a sole proprietor, no Social Security or Medicare taxes apply to his wages – saving even more. Alex owes no income tax on $6,000 (it’s below his standard deduction), and he gains real work experience (and a beefed-up savings account for college). This arrangement is well within IRS rules: Alex does legitimate work (stocking shelves, making TikTok videos for the store), his pay is reasonable for those duties, and Jane keeps a timesheet and issues him a W-2. Come tax time, the family’s overall tax bill is lower, and the money paid stays in the family circle.

Example 2: The Toddler Model
The Browns run a small local bakery (an LLC taxed as a partnership of both parents). They feature their adorable 4-year-old daughter, Lily, in the bakery’s advertising flyers and social media posts – she’s literally the “face” of the business in some ads. They pay Lily a modeling fee of $1,000 for several photo shoots throughout the year. That $1,000 is a deductible marketing expense for the bakery. It directly reduces the bakery’s taxable income (saving the parents perhaps ~$250 in tax, assuming a 25% combined rate).

Because the bakery is a parent-only partnership and Lily is under 18, they don’t owe any FICA or FUTA payroll taxes on her payment. They document the work by keeping copies of the ads and time spent in shoots. Lily’s $1,000 is well under her standard deduction, so she owes no tax on it (and at age 4, obviously her parents manage the money for her, tucking it into a college savings account). This is a prime example of how even a very young child can legitimately earn wages in a family business – completely above board – when the work makes sense (in this case, modeling for business promotions).

Example 3: The S-Corp Tech Helper
John is the sole owner of an S-Corporation that develops websites. He hires his 17-year-old daughter, Maria, to help with graphic design and office admin during the summer. He pays her $12 per hour for her work, and she earns $10,000 for the year. The S-Corp deducts Maria’s $10,000 salary as a business expense, which reduces the company’s profit (and thus the amount that passes through to John’s taxable income). In John’s 24% tax bracket, that could save about $2,400 in federal tax for him.

Because it’s an S-Corp (a corporation for tax purposes), normal payroll taxes apply – so Social Security and Medicare were withheld from Maria’s pay, and the company paid its employer share as well (roughly $765 each). However, Maria will get a lot of her withheld income tax back at tax time because $10,000 is under the taxable threshold for her (she may even claim exempt from withholding upfront).

In the end, the family still comes out ahead: John shifted $10k of high-taxed income off his plate, and Maria effectively pays minimal tax on it. Importantly, John treated Maria like any employee – he had her fill out a W-4, kept track of her hours designing logos and answering client emails, and paid her via the company payroll system. The result is real tax savings and a win-win: Maria gained job experience (and started a Roth IRA with part of her earnings), while John legally lowered his own taxes.

These examples show that with proper planning and execution, hiring your child can work in various business setups. Whether it’s a sole prop mom-and-pop shop or a more formal S-Corp, the keys are the same: real work, fair pay, and good records. When those elements are present, the strategy holds up and the benefits are very tangible.

Proof That This Deduction Holds Up

You might be thinking, “This sounds great, but will the IRS really go along with me paying my kid and writing it off?” The answer: Yes, if you do it right. In fact, this tax strategy not only is written into IRS guidelines, but it has also been tested in tax court cases. Here’s the proof:

IRS Blessing: The IRS explicitly allows deductions for wages paid to family members, including your children. The agency’s own publications outline that as long as the work is necessary for the business and the pay is reasonable, you can deduct it. The IRS even provides special payroll tax exemptions when the business is parent-owned (more on that soon). This isn’t a loophole in the shadows – it’s in black and white in IRS rules. So, if you ever face an audit, a properly documented child wage deduction is backed by IRS’s own regulations.
Tax Court Cases: There have been cases where the IRS challenged parents on this deduction – and the outcomes reinforce the “do it right” mantra. In one case, a couple paid their four children tens of thousands of dollars in wages through their family business.
- The court actually agreed that the children did valuable work and allowed most of the wages as a deduction. However, the parents had given huge year-end “bonuses” to the kids that didn’t line up with hours worked (essentially rewarding them based on business profits). The court found those extra-large bonus amounts unreasonable – something unrelated businesses wouldn’t do – and disallowed the excess. The takeaway: paying your kids for real work was upheld, but overpaying them beyond a reasonable rate was not.
Another Cautionary Tale: In a different case, a parent (who was a lawyer) tried to deduct around $10,000 per year in “wages” to each of her three young kids (all under age nine). The problem? She had no records – no W-2s, no clear logs of what work these very young children did. Unsurprisingly, the tax court mostly disallowed her deduction. They couldn’t verify the kids actually earned that money through work. In the end, the court generously allowed a token $250 per child per year as deductible (essentially acknowledging the kids might have done some minor tasks like shredding paper). But the bulk of her claimed deduction was thrown out due to lack of proof. Lesson learned: document everything and don’t push the envelope (9-year-olds probably weren’t doing enough work to merit $10k each, and the IRS saw right through it).
Audit Tips: These cases prove that when challenged, a well-founded arrangement holds up. The IRS and courts look for a bona fide employer-employee relationship. They want to see that your child actually worked, was actually paid, and that the pay was in line with the job. If you have timecards, examples of work (like designs your kid made, or photos of them working in the shop), and you pay via check or payroll service, you’re creating a paper trail of legitimacy. Under those conditions, even if the IRS comes knocking, you can confidently show that this was a normal business expense. Thousands of family businesses successfully claim this deduction every year – it’s not exotic or suspicious as long as it’s handled in a businesslike way.

In summary, both IRS guidance and real legal cases underscore that the “hire your kids” strategy is legal and defensible. The deduction holds up under scrutiny when you follow the guidelines. But if you try to game the system by paying exorbitant “wages” for little work, or fail to document the arrangement, you risk losing the deduction. Stick to the straight and narrow, and you have solid ground to stand on.

What to Know: IRS Rules vs. State Rules

Tax laws come at two levels – federal (IRS) rules that apply nationwide, and state-specific rules that can vary. When employing your child, you need to be mindful of both. Here’s a breakdown of what you should know about IRS rules first, then the state-level nuances:

Federal IRS Rules (The Big Picture)

Deductibility: For federal tax purposes, wages paid to your child are deductible if they meet the general test for any business expense – they must be ordinary and necessary for your business. “Ordinary” means common and accepted in your trade, and “necessary” means helpful and appropriate. Paying your child to perform a legitimate service (office help, farm work, marketing, etc.) can qualify on both counts. So, ensure the job you give them is something the business genuinely needs done.

Reasonable Compensation: The IRS requires that compensation to any employee (family or not) be reasonable for the services actually rendered. This is especially scrutinized with family to make sure you’re not just funneling money tax-free. In practice, reasonable means the pay should be similar to what you’d pay a stranger for the same work, considering the child’s age and skills. Document the basis for the wage rate – for example, if your 16-year-old daughter is doing data entry, you might note that $12/hour is the going rate for part-time office assistants locally. Avoid any urge to be overly generous just because it’s your child, at least on the books.

Employment Taxes (FICA and FUTA): Here’s where the type of business entity you have makes a big difference (and this is a special federal provision):

If your business is a sole proprietorship (or a single-member LLC treated as such) owned by the parent, or a partnership where each partner is a parent of the child, then wages paid to a child under 18 are NOT subject to Social Security and Medicare (FICA) taxes. In plainer terms, neither you nor your child have to pay those payroll taxes on their checks – a nice savings of 15.3% on those wages. Similarly, the wages are exempt from federal unemployment tax (FUTA) until the child turns 21.
- (After age 21, you’d start paying FUTA for them, but still no FICA until 18.) This is a tax break specifically designed for family businesses. Important: You still must withhold income tax from their paycheck (unless, for example, the child claims exemption on the W-4 because they expect to earn below the tax-filing threshold). But those withheld income taxes might be refunded to your child when they file their own return, as we’ll touch on.
If your business is a corporation (C-Corp or S-Corp) or a partnership with non-parent partners (or any business where the child’s parents don’t own 100% of the company), then all normal payroll taxes apply. There’s no FICA exemption in this case. You have to withhold and pay Social Security, Medicare, and FUTA taxes for your child’s wages, just as you would for any employee. Don’t let that discourage you – the wages are still deductible and the income shifting still works – it’s just that the payroll tax savings won’t be there if you operate under these structures.

In short, the IRS gives the biggest break to unincorporated family businesses (sole proprietorships and parent-only partnerships). If that’s you, take advantage of the FICA/FUTA exemption for your under-18 child – it’s essentially free of those employment taxes. If you have an S-Corp or another structure, you can still hire your kid, but plan for the extra payroll tax cost (which is usually modest on a part-time wage).

Payroll Filings: Even if you don’t owe certain taxes for the child’s pay, you likely still need to file the usual payroll returns. For example, a sole proprietor with an under-18 child won’t owe FICA, but should still file a quarterly Form 941 (the employer’s quarterly tax return) to report wages and any withheld federal income tax. They’ll simply mark zero for Social Security and Medicare amounts. Likewise, at year end, issue a Form W-2 to your child (showing their earnings and any withholding). This not only keeps you in compliance, it also reinforces the legitimacy of the employment.

Documentation: The IRS loves documentation. Have a simple employment agreement or offer letter that spells out your child’s job duties, work hours, and pay rate. Keep a log of hours worked (even a notebook or spreadsheet will do). Save work product (if your kid designs a flyer, keep a copy; if they clean the office weekly, keep a chore checklist or photos). Also, pay them in a trackable way – by check from the business account or a direct deposit transfer. All this evidence can be tucked away with your tax records. Should the IRS ever inquire, you can confidently present a package showing this was a real job.

No “Double Dipping”: One more IRS-related note: You can’t deduct the same expense twice. If you pay your child, that’s a wage expense deduction – but you can’t also try to deduct those funds as something else (for instance, you can’t deduct it as “contract labor” and also as “education expense” just because your kid might use it for college). Sounds obvious, but just be clear in your bookkeeping that this is wage expense, period. Also, if you pay your child and then they use that money to say, buy their own school clothes, you can’t deduct those personal purchases; the tax benefit came through the wage deduction already.

Now, beyond the IRS, each state has its own layer of rules when it comes to employing family:

State Rules and Nuances

State Income Tax: In general, states follow the federal treatment for wage deductions – if it’s a legitimate business expense federally, it will be for state tax as well. So you can typically deduct your child’s wages on your state business income or franchise tax return too. On the child’s side, many states have their own income tax with their own standard deduction or exemption amount. Often, if the child’s income is below a certain threshold, they won’t owe state income tax either (and may not need to file a state return). For example, if a state’s standard deduction for single filers is $5,000 and your child earns $4,000, they pay no state tax. But if they earn above it, they might owe a small amount of state tax. Tip: Check your state’s filing rules for dependents – some states require a return if any tax was withheld and the child wants a refund, or if income exceeds a modest amount.

State Payroll Taxes: Be aware that states have payroll taxes too, such as state unemployment insurance (SUI) and sometimes state disability insurance or other employment taxes. Many states provide similar exemptions for employing your minor child as the federal government does, but not always in exactly the same way. For instance, some states do not require unemployment insurance coverage (and thus no SUI tax) for a minor child employed by a parent’s business. As an example, California’s regulations exempt children under 18 working for their parent (or parent-only partnership) from the definition of “employment” for state unemployment insurance purposes.

This means you wouldn’t have to pay California’s unemployment tax on those wages. Not every state has identical rules, though. It’s worth visiting your state’s labor or revenue department website (or speaking with your payroll provider) to see if you need to pay state unemployment or other employment taxes on your child’s wages. In many cases, if federal FUTA doesn’t apply, the state may also waive SUI – but verify to avoid any surprises.

Child Labor Laws (State Level): While the federal FLSA (Fair Labor Standards Act) sets baseline rules for child labor (which, as we saw, generously exempts parent-owned businesses from many restrictions), states can impose stricter rules. And when it comes to labor laws, the stricter rule (state vs. federal) is the one you must follow. Some ways state laws may differ or add restrictions:

Minimum Working Age: A few states might not fully adopt the federal “any age if family business” stance. They might set a minimum age (e.g., 12 or 14) for certain types of work even in a parent’s company, or require special permission for very young workers. Always ensure that what you have your child doing is legal for their age under your state’s law. (Generally, non-hazardous work in a parent-owned business is allowed at any age, but double-check your state.)
Work Permits: A majority of states require minors (often under 16, sometimes under 18) to obtain a work permit or “working papers” from their school or state labor department before they can be employed – even by a parent. This is typically a simple form or certificate that verifies the child’s age and that they have permission to work. If your state has this requirement, get the work permit for your child. It’s usually straightforward (often the school administration office can assist) and it’s another piece of evidence that you’re following the rules.
Hours and Times: States often limit the number of hours per day and per week that minors can work, especially on school days or nights. For example, a state might say a 14–15-year-old can’t work more than 3 hours on a school day or past 7 p.m. on a school night. Even though the federal law wouldn’t restrict a 15-year-old working for a parent, your state might. So if your 15-year-old is helping in your business, you may need to stick to these hour limits. It’s good practice anyway to ensure the job doesn’t interfere with their schooling. (During summer or non-school days, the allowable hours often increase.)
Hazardous Work: Neither federal nor state laws allow minors to do hazardous jobs (like operating heavy machinery, using certain power tools, driving for work, etc.). If your business has any dangerous tasks, do not assign those to your child if they’re under 18. States might have their own list of prohibited occupations for minors – typically it mirrors the federal list. Keep your child’s work duties on the safe side.

Other State Considerations: A few other things to check locally: If your state has a minimum wage higher than the federal minimum, you generally must pay whichever is higher. Family business or not, paying your child $3 an hour when the state minimum is $10, for example, is not acceptable. Pay at least minimum wage (and again, it should be a fair wage regardless). Also, some states may exempt family employees from workers’ compensation coverage, while others do not. If your business is required to carry workers’ comp insurance for employees, find out if your child needs to be included or if there’s an exemption.

Finally, keep in mind that state tax agencies and labor departments can audit too. They’re usually less involved than the IRS, but you want to be in compliance at all levels. The good news is that if you conscientiously follow federal rules and then just cross-check your state’s specific requirements, you’ll likely be fine. The combination of solid federal documentation and adhering to state youth employment laws will make your arrangement bulletproof.

Key Concepts Explained in Plain English

This topic comes with its fair share of tax jargon and technicalities. Let’s break down some key concepts in simple terms, so you understand exactly what’s going on:

Standard Deduction (for a Child): The standard deduction is a set amount of income that a taxpayer can earn tax-free. For example, in 2023 a single person has a $13,850 standard deduction. A dependent child’s standard deduction is usually slightly different: it’s either $1,250 or their earned income + $400, whichever is larger (up to that $13k+ limit). In plain English, if your child earns, say, $10,000 from working for you, their standard deduction would be $10,400 (making $10k of it tax-free). If they earn $500, their standard deduction would be $1,250 (so all $500 is tax-free). The practical point: as long as your child’s wages are around or below this threshold (which changes a bit each year), they won’t owe federal income tax on it. It’s why so many people cite the “pay your kid $12k” strategy – because that was roughly the standard deduction amount in recent years.
Ordinary and Necessary: This is a phrase from tax law that basically means a business expense should be normal for your type of business and helpful for carrying on that business. Hiring your child falls under this concept if the job they do is something a business like yours would plausibly need. For example, it’s ordinary and necessary for a family farm to have kids help with farm chores or a family retail shop to have a teenager run the register. It would not be ordinary or necessary for a law firm to “hire” a 6-year-old to draft contracts – that would never happen with an unrelated employee and wouldn’t pass the smell test. So, frame your child’s role as one that makes sense given the nature of your work.
FICA Taxes (Social Security and Medicare): These are payroll taxes that fund Social Security and Medicare. Together they total 15.3% of wage income (12.4% for Social Security and 2.9% for Medicare). Normally, half is paid by the employer and half by the employee via withholding. When we say your child’s wages are “exempt from FICA” in a sole-proprietor scenario, it means neither you nor your child have to pay that 15.3% on their pay. That’s a significant savings. However, note that if no Social Security tax is paid, those earnings won’t count toward your child’s future Social Security benefits. This is usually not a big concern for minor children with just a few years of part-time work – they’ll have plenty of time in adulthood to earn credits. And paying $0 tax now far outweighs a tiny bump in a benefit decades later. If you really wanted, your child could voluntarily pay self-employment tax to get credits – but almost nobody does that for a minor’s small wages.
FUTA (Federal Unemployment Tax Act): This is a federal tax that employers pay to fund unemployment insurance (employees don’t pay this one). It’s 6% on a base amount of each employee’s wages (the first $7,000 typically), but most employers get a credit that makes it effectively 0.6%. When we say your under-21 child’s wages are exempt from FUTA (in a sole prop/parent partnership), it means you don’t have to pay that small 0.6% federal unemployment tax on their wages. Again, small potatoes compared to the bigger income and FICA tax aspects, but every bit helps.
Business Structures: This refers to how your business is organized for tax and legal purposes. The common ones are:
- Sole Proprietorship: One owner, unincorporated. For taxes, you report business income and expenses on Schedule C of your personal return. If you’re in this category, you get the maximum benefit from hiring your child (deduction + no FICA/FUTA taxes if under age thresholds).
- Partnership: Two or more owners. If it’s just you and your spouse (and you file jointly), you might actually elect to be treated as a Qualified Joint Venture (which is like two sole props) for simplicity. If not, the partnership files a Form 1065 and issues K-1s. If the only partners are the parents of the child, the FICA/FUTA exemption for the child’s wages still applies. If any other partner is involved, it doesn’t.
- LLC (Limited Liability Company): This is a legal entity that can be taxed in different ways. A single-member LLC by default is taxed like a sole prop; a multi-member LLC is usually taxed like a partnership; or an LLC can elect to be taxed as an S-Corp or C-Corp. So “LLC” by itself isn’t a tax status – it follows one of the above rules depending on election. The family-employment tax exemptions will depend on how your LLC is taxed (disregarded = sole prop, etc., as above).
- S-Corporation: A corporation that passes its income to shareholders (you) for tax (avoiding double taxation). You file a corporate return (1120-S) and you also draw a salary as an employee-owner. For your child, an S-Corp is treated like any corporation – no special FICA breaks for junior, unfortunately.
- C-Corporation: A regular corporation (Form 1120) that pays its own taxes. If you have one of these, you can still hire your child and deduct the wages, but again, no payroll tax exemption because the corporation is a separate entity.
Withholding & W-4: Even if your child likely won’t owe income tax, by default an employer should withhold taxes from paychecks according to the W-4 form the employee fills. Your child can fill out a W-4 Form and if they meet certain conditions (like they had no tax liability last year and expect none this year), they can write “Exempt” on it. That tells you as the employer not to withhold federal income tax from their wages. Many minors who will earn under the standard deduction do this to keep their paychecks whole. Just make sure they truly qualify (most do). If you do end up withholding some tax and they didn’t need to pay any, no biggie – they’ll file a simple tax return in spring to get a full refund of the withheld amount.
Dependent vs. Employee: Some parents wonder if paying their child means the child is no longer a “dependent” for tax purposes. Fear not: as long as your child doesn’t provide more than half of their own support, you can still claim them as a dependent on your return (and get the Child Tax Credit if otherwise eligible). Wages they earn count as them providing their own support if they actually use that money to cover their expenses. In most cases, kids still rely on their parents for the majority of living costs. For example, if you pay your 17-year-old $5,000 this year and they spend it on movies, clothes, and savings, you probably still provided the bulk of actual support (housing, food, etc.). They remain your dependent. If you went overboard and paid a kid so much that they are literally covering most of their expenses, you might lose the dependency claim – but that scenario is rare and usually not advantageous anyway. Bottom line: paying your dependent a reasonable wage will not usually jeopardize your ability to claim them on your taxes.
Kiddie Tax: This is a tax rule that applies to unearned income (like investment income) of children under a certain age. It does not apply to earned income like wages from a job. So if someone warns, “careful, the kiddie tax will eat up their money,” that doesn’t hold true here. Wages are earned income and are taxed at the child’s own tax rate (which for low income is 0% to 10%). The kiddie tax is only a concern if your child has substantial investment income (like dividends, interest) above a threshold (around $2,500). That’s unrelated to paying them wages, so you can put that worry aside.
IRA Contribution: A great side benefit of your child earning wages is that they become eligible to contribute to an IRA (Individual Retirement Account) in their name. They can contribute up to the amount they earned (with an annual cap of $6,500 for 2023) into, say, a Roth IRA. A Roth IRA for a 15-year-old is powerful – decades of tax-free growth ahead! And because their income is low, they likely pay no tax now, making Roth a great choice. The fact that this is possible underscores that these wages are “real” in the eyes of the IRS – your child is treated as having earned income, same as any other worker. Many parents use this as a teaching moment: half the kid’s paycheck goes to a Roth IRA or college fund, half for spending. It’s not a tax deduction per se, but it’s a long-term financial bonus enabled by this strategy.

I know that’s a lot of concepts, but understanding them even at a high level will help you navigate the process confidently. Essentially, the government gives family businesses some unique breaks (like skipping certain taxes) to ease employing your kids, but it expects you to uphold your end (treating it like genuine employment). With these plain-English explanations, you’re better equipped to do just that.

Pros and Cons of Hiring Your Child

Like any tax strategy, employing your child comes with upsides and downsides. Here’s a side-by-side look at the benefits and potential drawbacks:

Pros of Hiring Your Child	Cons of Hiring Your Child
Big Tax Savings: Lowers your taxable business income – shifting income to your child’s lower tax bracket (often 0% tax for them). This can save you hundreds or thousands in income taxes.	Paperwork & Compliance: You’ll have to do payroll paperwork (W-4, I-9, quarterly filings) and adhere to child labor laws. It’s an extra administrative step for the business.
Payroll Tax Perks: If you’re a sole prop (or similar), you avoid paying Social Security, Medicare, and FUTA on their wages (when under age thresholds). This means more of the money stays in the family rather than going to the IRS.	Potential for IRS Scrutiny: A poorly executed plan (too-high pay or no documentation) could draw IRS attention. You need to be prepared to justify the arrangement if asked.
Family Wealth Transfer: The money you pay your child is effectively moving wealth to them tax-free. They can use it for education, savings, or personal expenses – reducing the amount you’d pay out-of-pocket for those anyway.	Actual Cost to Business: You must pay them a real salary. That’s cash leaving the business (though it’s staying in the family). If cash flow is tight, this is something to budget for – you don’t want to harm the business for a tax break.
Real Work Experience: Beyond taxes, your child gains work experience, builds responsibility, and learns how to earn and manage money. This can be invaluable for their personal development (a pro for the family, though not a tax pro).	Limited by Age & Ability: You might not be able to legitimately have your child do everything. Very young kids can only handle very simple tasks (if any), and even teens have school commitments. The scope of help they can provide is somewhat limited.
Retirement Savings Jumpstart: With earned income, your child can contribute to a Roth IRA or other retirement account early, potentially giving them a huge head start on compound growth. It’s like a bonus benefit facilitated by this strategy.	Impact on Benefits/Credits: In some cases, your child’s income could affect things like financial aid for college (student income can count against aid formulas) or require them to file a tax return. Also, if you were on the edge for any income-based benefits, shifting income to a child isn’t usually negative, but be mindful if any family benefits consider household income. (Generally, their income is not counted as yours, so this is rarely an issue.)

As you can see, the pros are pretty compelling: tax reduction, keeping money in the family, and personal growth for your child. The cons are manageable with a bit of effort and care. By understanding the potential downsides (and planning for them), you can largely mitigate those issues. For example, using a payroll service or software can handle the paperwork burden cheaply, and sticking to a modest, justifiable wage will avoid IRS problems. Most families who legitimately employ their kids feel the pros far outweigh the cons – but it’s wise to consider both sides before diving in.

FAQs (Frequently Asked Questions)

Q: Is it really legal (and IRS-approved) to deduct wages paid to my child?
A: Yes. Hiring your child is legal and the wages are tax-deductible, provided the work and pay meet IRS guidelines (genuine work tasks, reasonable pay, and proper documentation).

Q: Is there a minimum age requirement to put my child on the payroll?
A: No. There’s no set minimum age under federal law if it’s your own business – even a young child can work in a family business (in non-hazardous roles). Just ensure the job is appropriate for their age.

Q: Do I need to withhold taxes from my child’s paycheck?
A: Yes. Treat your child like any employee for tax withholding. Have them complete a W-4 form. If they qualify, they can claim “Exempt” to avoid income tax withholding (since they likely won’t owe tax), but you still file payroll forms.

Q: Will my child have to pay income tax on the money they earn?
A: Usually not. If you keep their annual wages within the standard deduction limit (around $13,000+), they won’t owe federal income tax. Any small amount withheld can be refunded when they file their own return.

Q: Can I still claim my child as a dependent if I pay them a salary?
A: Yes. You can still claim them as a dependent (and get Child Tax Credit, etc.) as long as you provide more than half of their support. Paying them wages doesn’t automatically stop you from claiming them – most parents still easily meet the support test.

Q: Should I give my child a 1099 instead of a W-2 to keep things simple?
A: No. If your child works in your business under your direction, they are an employee and should receive a W-2. A 1099 (independent contractor) for your child can cause self-employment tax issues and won’t save you effort or audit risk.

Q: Will hiring my child trigger an IRS audit?
A: No – not if done correctly. The IRS doesn’t flag family wages by default. It’s a common practice. Just make sure you pay a reasonable wage and keep good records. Unusually high payments or poor documentation are what draw scrutiny, not the simple fact that you hired your kid.

Q: How much can I pay my child without them owing any tax?
A: About $13,000 per year (give or take). If you pay them up to the standard deduction amount for the year (which adjusts for inflation, e.g. $13,850 for 2023), they can earn that much tax-free at the federal level. Above that, they’d start owing a little tax on the excess.

Q: What kind of work can a young child realistically do in a business?
A: Age-appropriate tasks. Younger kids might model for ads, help clean the office, shred papers, or do simple packaging tasks. Teens can handle more, like office work, marketing on social media, customer service, etc. The work should align with their age and skills – and always be safe and legal.