How to Pay Your Children to Work In Your Business

This is a common question from family business owners with children they'd like to employ for a variety of reasons, including getting their retirement savings started.  It can be done in a legal way and does often require tax reporting, so make sure to consult with your CPA, nothing in a general article like this is EVER tax advice or specific to your facts. 

Here's what the IRS says https://www.irs.gov/newsroom/tax-treatment-for-family-members-working-in-the-family-business

Here are some basics to consider:

To legally pay your children to work in your business, you must treat them like genuine employees by giving them age-appropriate, necessary work and paying them a reasonable wage

This practice offers significant tax benefits, especially for sole proprietorships, but requires meticulous record-keeping to satisfy IRS and labor law requirements. 

IRS requirements.

To ensure the employment is legitimate for tax purposes, you must follow these rules: 

• Assign real work: The job your child performs must be a legitimate business service that is "ordinary and necessary" for your business. For example, cleaning a business office counts, but personal chores like mowing the lawn at home do not.
• Ensure work is age-appropriate: The work should be reasonable for your child's age. The IRS would likely question a toddler doing bookkeeping, but a 16-year-old managing social media or a 12-year-old handling filing could be considered legitimate.
• Pay a reasonable wage: The compensation must be comparable to what you would pay a non-relative for the same work. The IRS may flag excessively high wages for simple tasks.
• Keep thorough records: You must maintain records of hours worked, pay received, and dates of service. This proves the work was performed and that you followed all employment laws.
• Issue a Form W-2: For official employees, you must issue a Form W-2 for wages paid, not a Form 1099, to avoid misclassification issues. 

Tax benefits by business structure

The employment taxes you and your child pay will depend on your business structure and your child's age: 

Sole proprietorship or parent-only partnership

• Children under 18: Payments are exempt from Social Security and Medicare (FICA) taxes. You are not required to pay FICA as the employer, and your child does not pay as the employee.
• Children under 21: Payments are exempt from Federal Unemployment Tax Act (FUTA) taxes.
• Income tax withholding: You must still withhold income tax from your child's pay, regardless of their age. 

Corporations, estates, or non-parent partnerships

• All taxes apply: For these structures, your child's wages are subject to federal income tax withholding, FICA, and FUTA taxes, just like any other employee, regardless of their age. 

Deductions and tax-free income

• For your business: The wages you pay your child are a deductible business expense, which lowers your taxable income.
• For your child: For the 2025 tax year, your child can earn up to $15,000 (the standard deduction for single filers) in tax-free wages, provided they have no other sources of income. 

Federal and state child labor laws

In addition to IRS rules, you must comply with child labor laws from the Department of Labor and your state. 

• Federal law: For nonagricultural work in a parent-owned business, federal law allows children under 16 to work any time of day for any number of hours. However, they cannot work in manufacturing, mining, or other hazardous occupations.
• State laws: State laws may impose stricter restrictions on working hours, types of jobs, and work permits. You must follow the stricter law, whether federal or state. 

How to set up and pay your child

1. Obtain a Social Security number (SSN) for your child if they don't have one.
2. Get an Employer Identification Number (EIN) for your business if you don't already have one.
3. Complete employment forms: Fill out a Form I-9 and a Form W-4 with your child.
4. Create a paper trail: Keep a job description, timesheets, and a written employment agreement to document their work and your expectations.
5. Pay via check or direct deposit: Pay your child from your business bank account, preferably via check or direct deposit, and not in cash. This provides a clear record of payment.
6. Issue a Form W-2 at the end of the year if your child is classified as an employee.