To add your child as an employee, you set up standard payroll: get an Employer Identification Number, have your child complete Form I-9 and Form W-4, write a job description for real work at a fair wage, track hours, pay through the business account, and file quarterly Form 941 plus a year-end W-2. If your business is a sole proprietorship, a single-member LLC taxed as one, or a partnership where the only partners are the child’s parents, wages to a child under 18 are exempt from Social Security and Medicare tax, and wages to a child under 21 are exempt from federal unemployment tax.1Internal Revenue Service. Tax Treatment for Family Members Working in the Family Business
Whether Your Business Structure Allows the Tax Break
Entity type decides whether this strategy saves you meaningful payroll tax or just adds paperwork. Sort this out before anything else.
Sole Proprietorships and Parent-Only Partnerships
Wages a parent pays a child under 18 through a sole proprietorship are exempt from both halves of Social Security tax (6.2%) and both halves of Medicare tax (1.45%).2Office of the Law Revision Counsel. 26 USC 3121 – Definitions A partnership qualifies for the same treatment only if every partner is a parent of the child. A single-member LLC that has not elected corporate tax treatment is taxed as a sole proprietorship, so it qualifies too.1Internal Revenue Service. Tax Treatment for Family Members Working in the Family Business
Wages these same entities pay a child under 21 are also exempt from the employer’s 6% Federal Unemployment Tax on the first $7,000 of wages.3Office of the Law Revision Counsel. 26 USC 3306 – Definitions Federal income tax withholding still applies regardless of entity, though most children earn too little to owe any.
Corporations and Partnerships With a Non-Parent Partner
If the business is a corporation, including an S-corp, the FICA and FUTA exemptions do not apply, even when the parent owns 100% of the shares. The corporation must withhold 6.2% for Social Security and 1.45% for Medicare from the child’s pay and match those amounts.4Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates The same rule applies to a partnership that includes any partner who is not the child’s parent, regardless of ownership percentage.1Internal Revenue Service. Tax Treatment for Family Members Working in the Family Business You can still hire your child through these entities and take a business-expense deduction for the wages; you just do not get the payroll tax exemptions.
Age Limits and What Your Child Can Do
Under the Fair Labor Standards Act’s parental exemption, a parent can employ their own child under 16 in any occupation other than manufacturing, mining, or work the Department of Labor has declared hazardous for minors.5eCFR. 29 CFR 570.126 – Parental Exemption There is no federal minimum age floor, so young children can perform simple tasks like organizing inventory or stuffing envelopes. Children 16 and older can work in any non-hazardous job.
The hazardous occupation list is broader than parents often assume. It reaches roofing, power-driven woodworking or metalworking machines, demolition, excavation, logging, and work with radioactive materials, and those restrictions apply to anyone under 18 even in a parent’s business.6eCFR. Child Labor Regulations, Orders and Statements of Interpretation The exemption also requires that your child be exclusively employed by you. If the child helps you perform work for another business, the exemption does not apply.
The work itself has to be real and the pay has to match. The IRS looks for tasks that are legitimate and necessary for the business, and compensation that reflects the fair market value of the services. Filing, cleaning the office, managing social media, answering phones, or assembling products all qualify when the child actually performs the work. Paying a teenager a reasonable hourly rate for administrative tasks is defensible. Paying a young child $50 an hour to shred paper is not.
Setting Up Before the First Paycheck
Get an EIN
If you do not already have an Employer Identification Number, apply for one before running payroll. The IRS requires an EIN for any business with employees, and you can apply online for free and receive the number immediately.7Internal Revenue Service. Employer Identification Number Sole proprietors who previously filed with a Social Security number need an EIN once they put someone on the books.
Complete Form I-9
Every U.S. employee must complete Form I-9, Employment Eligibility Verification, regardless of family relationship.8U.S. Citizenship and Immigration Services. I-9, Employment Eligibility Verification Your child will need to present acceptable identification, such as a birth certificate or passport. For employees under 18 who cannot supply the standard List B identity document, the USCIS Handbook for Employers provides alternative guidance.9U.S. Citizenship and Immigration Services. Instructions for Form I-9, Employment Eligibility Verification Keep the completed I-9 on file for the entire period of employment and for at least three years after the hire date or one year after employment ends, whichever is later.10U.S. Citizenship and Immigration Services. 10.0 Retaining Form I-9
Complete Form W-4
Your child completes Form W-4 so you can determine federal income tax withholding.11Internal Revenue Service. About Form W-4, Employee’s Withholding Certificate Most children in a family business earn less than the standard deduction, which is $16,100 for single filers in 2026.12Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 If the child had no tax liability last year and expects none this year, they can write “Exempt” on the W-4 and skip withholding. That exemption must be renewed each year.
Write a Job Description and Track Hours
Draft a written job description covering duties, expected hours, and pay rate. It does not need to be elaborate, but the tasks should be ones a reasonable person would recognize as work rather than household chores relabeled as business expenses. Track hours the way you would for any other employee, recording start and end times and breaks each shift. A digital time-tracking app or a signed handwritten log both work. Payroll records must be preserved for at least three years from the last date of entry.13eCFR. 29 CFR Part 516 – Records to Be Kept by Employers
Paying Your Child and Filing Payroll Reports
Every payment should leave a clean paper trail. Write a check from the business account, set up direct deposit to your child’s own bank account, or use a payroll service. Cash payments and transfers into a joint parent-child account both blur the line auditors look for between business money and family money. Record each payment as a labor expense in your books; the wages then reduce your business’s taxable income the same way any other payroll would.
Quarterly Form 941
Employers generally file Form 941 each quarter to report wages and any federal income, Social Security, and Medicare taxes withheld.14Internal Revenue Service. About Form 941, Employer’s Quarterly Federal Tax Return File the form even if withholding is zero, because it shows the IRS you have an employee. Some very small employers qualify to file annually on Form 944 instead; the IRS notifies you if you are eligible.
Year-End Form W-2
By January 31 of the following year, you must give your child a Form W-2 showing total wages and any taxes withheld, and file a copy with the Social Security Administration.15Social Security Administration. Employer W-2 Filing Instructions and Information – First Time Filers This applies even when every box on the W-2 is zero.16Internal Revenue Service. About Form W-2, Wage and Tax Statement Without a W-2, the IRS has no record that a real employment relationship existed, and the deduction you took can unravel.
What Your Child Owes in Taxes
Your child’s wages are earned income, which is treated much more favorably than investment income. A dependent child with earned income below the standard deduction owes no federal income tax.12Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Combined with a qualifying sole proprietorship, that means wages up to $16,100 in 2026 can move from the parent’s return to the child’s with no federal income tax, no Social Security or Medicare tax, and no FUTA, while the parent still deducts the full amount as a business expense.
Above that threshold, only the excess is taxed, starting at the 10% bracket. A child with any federal income tax withheld should file a return to claim the refund.
The kiddie tax does not apply here. That rule taxes certain children’s unearned income at the parents’ rate and covers dividends, interest, and capital gains, not wages from actual work.17Internal Revenue Service. 2025 Instructions for Form 8615 – Tax for Certain Children Who Have Unearned Income
Roth IRA With the Earned Income
Once your child has earned income, they can contribute to a Roth IRA. The 2026 limit is $7,500 or the child’s total earned income, whichever is less.18Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 Contributions are after-tax, but since the child likely owes no tax on the wages, the money effectively goes in tax-free and grows tax-free.
A minor cannot manage a brokerage account, so a parent opens a custodial Roth IRA and makes the investment decisions until the child reaches the age of majority in your state. The account belongs to the child. The IRS sets no minimum age for contributions, so a young child with documented earned income can participate. The long runway to retirement is the real payoff: contributions made in a child’s teens have decades to compound before any qualified withdrawal is needed.
State Rules to Check
Federal rules are only part of the picture. Many states require minors to obtain a work permit or age certificate before starting a job, and requirements vary widely: some states require certificates for all minors under 18, others issue them on request, and a few skip them but expect employers to keep proof of age on file.19U.S. Department of Labor. Employment/Age Certificate An age certificate protects you from unintentional child labor violations by documenting that your employee is old enough for the work.20eCFR. 29 CFR 570.121 – Age Certificates Check with your state’s department of labor before the first day.
State income tax withholding is separate from federal. If your state has an income tax, you may need a state-level W-4 equivalent, though most children earning below the state’s standard deduction will owe nothing. Workers’ compensation rules also vary. Some states require coverage for all employees including family members; others exempt a child working in a parent’s business. Your state’s workers’ compensation board can confirm what applies.
Mistakes That Trigger Audits
Inflated pay is the fastest way to draw scrutiny. Compensation should track what you would pay an unrelated employee for identical work. A $50,000 salary for a preteen filing papers will not survive review.
Skipping actual payroll is nearly as common. Deducting wages on your return without issuing paychecks, filing W-2s, or keeping time records leaves the IRS with nothing to distinguish wages from gifts, which costs you the deduction and can bring penalties.
Claiming the FICA exemption through the wrong entity is a costly error. If the business is an S-corp or a partnership that includes anyone besides the child’s parents, the exemption does not apply, and discovering that during an audit means back taxes, interest, and possible penalties on every dollar paid.1Internal Revenue Service. Tax Treatment for Family Members Working in the Family Business Confirm your entity classification before the first paycheck goes out.