Paying family members for real work in your business can legally shift income into lower brackets, reduce self-employment tax, and keep more money in the family—while teaching valuable skills. Here’s the short, practical version.
Why it works
- Income shifting: Pay your child for bona fide work → income moves from your higher bracket to their lower (often 0%).
- Business deduction: Wages are a deductible payroll expense (and can reduce SE tax for sole proprietors).
- Wealth building: Earned income allows Roth IRA contributions.
How much? Target wages at or below the current standard deduction if you want $0 federal income tax for the child. (The amount changes annually; payroll taxes may still apply depending on your entity.)
Who can do this (and the payroll rules)
Sole proprietors & spousal partnerships (both parents are partners):
- FICA: No Social Security/Medicare for your own child under 18.
- FUTA: Exempt for your child under 21.
- Result: Often no income tax for the child and no FICA/FUTA—very efficient.
S-corps, C-corps, and non-spousal partnerships:
- Business still deducts wages; children may be at 0% with standard deduction.
- FICA/FUTA apply like any employee.
Grandchildren & grandparents:
- No family payroll tax exemptions. Treat as regular employees.
- Still valid if work is real and pay is reasonable.
Do it audit-ready (quick checklist)
- Real work, real pay: Job description, market-rate wage, timesheets.
- Follow child-labor rules: Non-hazardous work; respect federal/state limits.
- Run payroll (W-2), not 1099: File payroll returns; issue W-2.
- Pay from the business account: Keep deliverables/photos as proof.
- Consider a Roth IRA: If the child has earned income.
Fast examples
- Sole prop hires 15-year-old: Pay up to the standard deduction → child likely owes $0 income tax; no FICA (<18) and no FUTA (<21). You deduct wages and reduce SE tax.
- S-corp hires 16-year-old: Deduction still good; FICA/FUTA apply.
- Grandparent part-time bookkeeping: Regular payroll taxes; still deductible.
Legit tasks (starter ideas)
Admin (scanning, filing), marketing (short videos, captions), website updates, inventory counts, basic data entry. Keep proof: task lists, timesheets, and work samples.
Avoid these mistakes
- No documentation or timesheets
- Paying for personal chores
- Issuing a 1099 to your employee-child
- Hazardous work or violating hour limits
- Unreasonable pay (well above market)
- Mixing rules (S-corp ≠ sole-prop payroll rules)
Want this set up correctly the first time? can tailor roles, rates, payroll, and a documentation pack for you.
Email: oshamsi@oscpatax.com
Contact: (214) 253-8515
Conclusion
Hiring your kids or grandparents can be a clean, compliant way to move income into lower tax brackets, reduce your overall tax bill, and build real skills in the family. The keys are simple: real work, market-rate pay, W-2 payroll when they are employees, and solid records. Match the payroll rules to your entity type, respect child-labor and safety limits, and keep proof of the work performed. Do that, and this strategy can deliver meaningful savings without creating audit headaches.
Need help setting up roles, rates, payroll, and documentation?
OS CPA Tax Advisory can implement everything end to end.
Email: oshamsi@oscpatax.com
Contact: (214) 253-8515
General information only; not tax advice. Thresholds (e.g., standard deduction) change—get guidance for your specific facts.
FAQs
1) Do I pay my child on a W-2 or a 1099?
Use W-2 payroll if your child is an employee. Do not issue a 1099 for employee-type work. W-2s keep withholding and year-end reporting accurate and align with the FICA and FUTA rules that differ by entity and the child’s age.
2) Can I pay my child from my S-corp and skip payroll taxes?
No. For S-corps and C-corps, FICA and FUTA generally apply to your child like any other employee. The family payroll tax exemptions apply to sole proprietors and to partnerships where both partners are the child’s parents, and only for specific ages.
3) How much can I pay my child without them owing income tax?
Aim to keep total wages at or below the current standard deduction if you want zero federal income tax for the child. The standard deduction changes, so confirm the annual amount. You can pay more, but some income tax may apply at the child’s rate.
4) What documentation should I keep to stay audit ready?
Keep a job description, market-rate pay support, timesheets approved by you, evidence of deliverables (files, photos, logs), and proof of payment from the business account. File payroll returns, issue a W-2, and follow child-labor and safety rules. If you fund a Roth IRA, keep records of earned income and contributions.
