You can put your child on the payroll of your LLC, and if the LLC is a single-member disregarded entity or a partnership where every partner is a parent of the child, the wages are exempt from Social Security and Medicare tax while the child is under 18 and exempt from federal unemployment tax while the child is under 21.1Internal Revenue Service. Family Employees Employing your child in your LLC also turns those wages into a deductible business expense, and the child’s own standard deduction usually wipes out any federal income tax on the earnings. The savings are real, but they depend on how the LLC is taxed, how old the child is, and whether the work and pay would look reasonable to someone who didn’t know you.
When the Tax Break Actually Applies
The payroll tax exemption lives or dies on your LLC’s federal tax classification. Before you decide whether hiring your child is worth the effort, check which box your business sits in.
Single-Member LLC or Parents-Only Partnership
A single-member LLC that hasn’t elected corporate treatment is a disregarded entity, taxed the same as a sole proprietorship. The parental employment tax exemption applies in full: no Social Security, no Medicare, no FUTA within the age limits above.1Internal Revenue Service. Family Employees The statutory basis for the FICA piece is 26 U.S.C. ยง 3121(b)(3)(A), which excludes service performed by a child under 18 working for a parent.2Office of the Law Revision Counsel. 26 U.S. Code 3121 – Definitions
The same exemptions extend to a partnership where every partner is a parent of the child.1Internal Revenue Service. Family Employees A married couple running an LLC together keeps the full benefit.
LLCs Taxed as an S-Corp or C-Corp
Electing corporate tax treatment kills the exemption. The IRS then treats the child as an employee of the corporation, not of a parent. That brings full Social Security tax at 6.2% and Medicare tax at 1.45% on both sides, plus FUTA.1Internal Revenue Service. Family Employees The combined FICA hit alone is 15.3% of the wages. The wage deduction still exists, but the payroll tax savings are gone.
LLCs With a Non-Parent Partner
If any partner in the LLC is not a parent of the child, the exemption disappears and the child is treated like any other employee for withholding, FICA, and FUTA regardless of age.1Internal Revenue Service. Family Employees Worth knowing before you bring in an outside investor.
What the Family Actually Saves
The benefit stacks in three layers. Missing any one of them leaves money on the table.
A Deductible Business Expense
Every dollar of reasonable wages you pay your child comes off the top of your business income. If the LLC earns $100,000 and you pay your child $10,000, you report $90,000. A parent in the 22% federal bracket saves $2,200 in income tax on that shift, and a self-employed parent also avoids the 15.3% self-employment tax on the same $10,000, another $1,530. The money stays in the family.
The Child’s Standard Deduction
For 2026, the standard deduction for a single filer is $16,100.3Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A dependent’s standard deduction is the greater of $1,350 or earned income plus $450, capped at $16,100. So a child earning up to $15,650 owes no federal income tax on the wages. Combine that with the FICA exemption, and a child under 18 in a qualifying LLC can take home the entire paycheck.
A Head Start on a Roth IRA
Earned income opens the door to a Roth IRA. For 2026, the contribution limit is $7,500 or the child’s total earned income, whichever is less.4Internal Revenue Service. IRA Contribution Limits A parent can fund the contribution on the child’s behalf as long as the child’s earned income supports it. Contributions go in after tax, but at this income level the child likely owes none, and the growth is tax-free for life.
What Your Child Can Legally Do
Federal child labor rules are far more permissive for parent-owned businesses than for other employers. Children of any age can work for a business owned entirely by their parents in nonagricultural occupations, and the federal hour and time-of-day limits that apply to 14- and 15-year-olds working for outside employers don’t apply.5U.S. Department of Labor. Fact Sheet #43: Child Labor Provisions of the Fair Labor Standards Act (FLSA) for Nonagricultural Occupations
Two hard limits still apply regardless of the parent-child relationship:
- Children under 16 cannot work in mining or manufacturing, even for a parent.
- No minor under 18 can perform any of the 17 categories the Department of Labor has declared hazardous, including operating forklifts and power-driven woodworking machines, roofing, excavation, working with explosives or radioactive materials, and slaughtering or meatpacking work.5U.S. Department of Labor. Fact Sheet #43: Child Labor Provisions of the Fair Labor Standards Act (FLSA) for Nonagricultural Occupations
State law adds another layer. Some states require work permits or age certificates even when the employer is a parent, some exempt parent-owned businesses entirely, and some impose tighter daily and weekly hour caps or restrict work during school hours. Where federal and state law disagree, the stricter rule controls. Check your state labor department before assuming the federal parental exemption is all you need.
Penalties for child labor violations run to a maximum civil money penalty of $16,035 per violation, rising to $72,876 if a violation causes serious injury or death, and $145,752 for willful or repeated violations.6U.S. Department of Labor. Civil Money Penalty Inflation Adjustments These figures adjust annually for inflation.
Setting Pay and Picking Duties That Hold Up
The IRS looks at wages paid to a child more closely than wages paid to a stranger. Two things matter: the work has to be real, and the pay has to be reasonable for that work.
Reasonable means what you’d pay a non-family member for the same job in your local market. If a filing clerk would earn $15 an hour, pay your child $15 an hour. A seven-year-old dusting shelves for an hour is not worth $30. A teenager with real graphic design skills might legitimately earn that.1Internal Revenue Service. Family Employees The question is whether you could defend the rate by pointing to comparable wages in your industry.
The duties have to fit the age and the business. Younger children can shred documents, stuff envelopes, clean, and organize inventory. Teenagers can handle bookkeeping, content creation, customer service, or data entry. Whatever the role, the child has to actually perform the work during the logged hours. Paying for work that didn’t happen isn’t a tax strategy; it’s a fraudulent deduction, and the IRS treats it that way.
Overpaying carries its own risk. If the IRS finds the compensation unreasonable, it can reclassify the excess as a nondeductible gift. You lose the deduction on that portion and, depending on the amount, may trigger gift tax reporting.
Paperwork That Keeps It Legitimate
Treat the hire with the same formality you’d use for a stranger. That is what turns a payment from a suspicious parental transfer into a documented business expense.
Get a Social Security number on file, have the child complete Form W-4 (a child with no prior or expected tax liability can claim exempt),7Internal Revenue Service. Form W-4 – 2026 Employees Withholding Certificate and complete Form I-9 within three business days of the first day of work.8U.S. Citizenship and Immigration Services (USCIS). Instructions for Form I-9, Employment Eligibility Verification For a minor under 18 who can’t produce a standard List B identity document, a parent can complete Section 1 and write “Individual under age 18” in the signature block.9U.S. Citizenship and Immigration Services. 4.2 Minors (Individuals under Age 18)
Keep a written job description and a real time-tracking system, digital or paper. Signed timesheets are the evidence that carries weight in an audit. Pay through the business bank account by check or direct deposit; cash with no paper trail is the fastest way to lose the deduction. File Form W-2 at year end (the 2026 wage filing deadline with the Social Security Administration is February 1, 2027)10Internal Revenue Service. General Instructions for Forms W-2 and W-3 (2026) and keep employment tax records for at least four years after filing the fourth-quarter return for the year.11Internal Revenue Service. Employment Tax Recordkeeping
Insurance and Workers’ Compensation
Adding your child to the payroll can create obligations you didn’t have before. Workers’ compensation rules vary widely by state. Some states exempt family members from mandatory coverage, some count them toward coverage thresholds, and a few require coverage regardless of family relationship. Check with your state workers’ compensation board before assuming your child is excluded.
General liability insurance typically covers third parties, not employees. If your child is injured on the job and your state doesn’t require workers’ compensation for family employees, the medical costs fall on your family. Carrying voluntary coverage may still be worthwhile.
Mistakes That Trigger Audits
Certain patterns draw immediate IRS attention:
- No timesheets or job description. Without contemporaneous records, the IRS can reclassify every dollar as a gift. Recreating records after a notice arrives looks like exactly what it is.
- Pay that doesn’t match the work. A 10-year-old paid $50,000 for light office chores will not survive scrutiny.
- Cash payments with no bank trail. If there’s no deposit record, the IRS has no reason to believe the child was paid.
- Skipping payroll taxes on wages from an S-Corp or C-Corp taxed LLC. The exemption doesn’t apply, and the mismatch shows up in W-2 filings.
- No W-2. Failing to file undercuts the argument that this is a real employment relationship.
The common thread is documentation. Parents who run the arrangement the way they’d run any other hire rarely see problems. Parents who treat it casually because the employee is their kid are the ones who lose the deduction.