Hiring Your Children in Your Business: Payroll Tax Exemptions, Reasonable Pay and the Kiddie Tax
In Short
Hiring Your Children means a parent's business employs its children and pays them a reasonable wage for real work. It is commonly used by sole proprietors and parent-owned partnerships, where wages to a child under 18 are not subject to social security and Medicare taxes.
TL;DR
- Wages a sole proprietor, or a partnership in which each partner is a parent, pays a child under 18 are not subject to social security and Medicare taxes [1][2].
- Those wages are also not subject to federal unemployment (FUTA) tax until the child turns 21 [1].
- A corporation, or a partnership with a non-parent partner, owes all the usual payroll taxes on a child's wages [1][2].
- The business deducts the wages only if the pay is reasonable and for services actually rendered [3].
- The kiddie tax applies to a child's unearned income, not to wages [4].
Quick Facts
| Legal Reference | IRC §3121(b)(3)(A), §3306(c)(5), §162 |
|---|---|
| Complexity | Low |
| Audit Risk | Medium |
| Setup Cost | Low — payroll, time records and a Form W-2 |
| Time to Implement | Days — payroll setup, job description and timesheets |
| Illustrative Example | Illustrative example, not a projection. A sole proprietor pays a 15-year-old $12,000 in 2025 for documented office and social-media work at a market hourly rate. The business deducts the wages, no social security, Medicare or FUTA tax applies, and the child's $12,000 of earned income is covered by the child's own standard deduction. Actual results depend on the facts, the records and the tax rates involved. |
Key Numbers & Limits
| Item | Limit or Rule | Notes |
|---|---|---|
| Social Security and Medicare Exemption | Child under 18 | Only for a sole proprietorship or a partnership in which each partner is a parent [1]. |
| FUTA Exemption | Child under 21 | Same business-form requirement [1]. |
| Dependent Standard Deduction (2025) | Greater of $1,350 or earned income plus $450 | Not more than the regular standard deduction [5]. |
| Single Standard Deduction (2025) | $15,750 | [5] |
| Kiddie Tax Threshold (2025) | Unearned income over $2,700 | Does not apply to wages [4]. |
What Is Hiring Your Children?
Hiring Your Children describes a parent who owns a business putting a child on the payroll for real work. The business can deduct reasonable wages for services actually rendered as an ordinary and necessary business expense [3]. The child reports the wages as earned income, often at a lower tax rate or with no income tax at all because of the child's standard deduction [5].
The payroll tax treatment depends on how the business is organized. IRS Publication 15 says payments for the services of a child under 18 who works for a parent in a sole proprietorship, or in a partnership in which each partner is a parent of the child, are not subject to social security and Medicare taxes, and the wages are not subject to FUTA tax until the child turns 21 [1]. Payments by a corporation, a partnership with a non-parent partner, or an estate are subject to those taxes regardless of age [1][2].
The kiddie tax is often raised alongside this arrangement. It taxes some of a child's unearned income — interest, dividends and capital gains — at the parent's rate when that income is over $2,700 for 2025. Wages are earned income and are not subject to the kiddie tax [4].
How Does Hiring Your Children Work?
- The parent identifies real, age-appropriate work the business needs, such as filing, cleaning, inventory, data entry or social-media content [3].
- The business sets an hourly rate in line with what it would pay an unrelated worker for the same job [3].
- The child records hours on timesheets, and the business pays wages through payroll to an account in the child's name [3].
- The business applies the payroll tax rules for its structure — exempt for a sole proprietorship or all-parent partnership, fully taxable for a corporation — and issues a Form W-2 [1][2].
- The child files a return if required; earned income up to the standard deduction is generally not subject to income tax [5].
The Good: What Are the Benefits of Hiring Your Children?
- Reasonable wages are deductible by the business and taxed, if at all, at the child's rate [3][5].
- For sole proprietorships and all-parent partnerships, wages to a child under 18 avoid social security and Medicare taxes, and FUTA until age 21 [1].
- Wages are earned income, so they are not subject to the kiddie tax [4].
- Earned income allows the child to contribute to an IRA or Roth IRA, up to the lesser of the annual limit or the child's compensation [6].
The Bad: What Are the Drawbacks of Hiring Your Children?
- The payroll tax exemption does not apply to S corporations, C corporations or partnerships with non-parent partners [1][2].
- Payroll, timesheets and a Form W-2 add administrative work.
- Wages paid to the child belong to the child.
- State and federal child labor laws limit the hours and types of work for minors, separate from the tax rules.
The Ugly: What Are the Serious Risks of Hiring Your Children?
- Wages for work that was not done, or that are far above what the work is worth, are not deductible; the IRS can disallow them and add a 20% accuracy-related penalty on the underpayment [3][7].
- Paying very young children for adult-level work, or paying without time records, invites scrutiny of whether services were actually rendered [3].
- Social-media versions that promise to “pay your kids tax-free” without describing real work and records fit the IRS warning about misleading tax advice online [8].
Who Uses Hiring Your Children?
Who It's Commonly Used By
What Are the Key Rules & Requirements for Hiring Your Children?
- Wages must be reasonable and for personal services actually rendered to be deductible [3].
- A child under 18 working for a parent's sole proprietorship or all-parent partnership is exempt from social security and Medicare taxes [1].
- The same child is exempt from FUTA tax until age 21 [1].
- Wages paid by a corporation, a partnership with a non-parent partner, or an estate are subject to all employment taxes [1][2].
- The kiddie tax applies to unearned income over $2,700 for 2025, not to wages [4].
- A dependent's 2025 standard deduction is the greater of $1,350 or earned income plus $450, up to the regular standard deduction [5].
What Are Common Mistakes & Red Flags With Hiring Your Children?
- No timesheets or job description.
- An hourly rate well above what an unrelated worker would earn.
- Wages paid in cash, or never actually transferred to the child.
- Claiming the payroll tax exemption through an S corporation [1].
- Paying a toddler for “modeling” or similar work with no market-rate support.
Frequently Asked Questions
Do I Have to Pay Payroll Taxes When I Hire My Child?
It depends on the business. A child under 18 working for a parent's sole proprietorship, or a partnership in which each partner is a parent, is exempt from social security and Medicare taxes, and from FUTA until 21 [1]. Wages paid by a corporation or a partnership with a non-parent partner are subject to all payroll taxes [1][2].
Can an S Corporation Hire the Owner's Children Without Payroll Taxes?
No. Payments for a child's services by a corporation are subject to income tax withholding, social security, Medicare and FUTA taxes regardless of age [2]. The business can still deduct reasonable wages for real work [3].
Does the Kiddie Tax Apply to Wages Paid to My Child?
No. The kiddie tax applies to a child's unearned income, such as interest and dividends, over $2,700 for 2025. Wages are earned income [4].
How Much Can My Child Earn Without Paying Income Tax?
For 2025, a dependent's standard deduction is the greater of $1,350 or earned income plus $450, up to the $15,750 standard deduction for a single filer [5]. Earned income up to that amount is generally not subject to federal income tax.
Sources
- Publication 15 (Circular E), Employer's Tax Guide — Family Employees — Internal Revenue Service
- Family Help — Internal Revenue Service
- 26 U.S. Code §162 — Trade or Business Expenses — Legal Information Institute, Cornell Law School
- Topic No. 553, Tax on a Child's Investment and Other Unearned Income (Kiddie Tax) — Internal Revenue Service
- Publication 501 (2025), Dependents, Standard Deduction, and Filing Information — Internal Revenue Service
- Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs) — Internal Revenue Service
- 26 U.S. Code §6662 — Imposition of Accuracy-Related Penalty on Underpayments — Legal Information Institute, Cornell Law School
- Dirty Dozen Tax Scams for 2026 — Internal Revenue Service
Primary sources only: the Internal Revenue Code, Treasury regulations and official agency guidance. Read how Zentavos researches these reports.