How a business can employ the owner's children for real work, when the wages escape payroll taxes and when they do not, and the records that separate family payroll from an allowance.
By Samuel Ortiz, CPA, CVA · Last updated August 23, 2026
A business can employ the owner's children for genuine work, deduct the wages like any other compensation, and the child pays tax at the child's own rate, which is often zero on earnings up to the standard deduction. When the employer is a sole proprietorship or a partnership owned only by the child's parents, wages paid to a child under 18 are also exempt from Social Security and Medicare taxes, an exemption that does not extend to corporations, including S corporations. The arrangement holds only when the work is real, the wage is reasonable for it, and timesheets, payroll, and a W-2 exist the way they would for any employee.
A business that needs work done can hire the owner’s child to do it, and when the arrangement is real the tax treatment follows on its own. The company deducts the wages the way it deducts any compensation, the income lands on the child’s return instead of the parent’s, and because wages are earned income covered by the child’s own standard deduction, earnings up to that amount typically produce no income tax for the child at all. Dollars that would have been taxed at the family’s highest rate are instead earned, openly and on a W-2, by the person who did the work, which is not a loophole so much as the tax system noticing who actually performed the labor.
For some businesses the treatment goes one step further, and the step is where most of the mistakes live. When the employer is a sole proprietorship, or a partnership in which the only partners are the child’s parents, wages paid to a child under 18 are exempt from Social Security and Medicare taxes, and remain exempt from federal unemployment tax until the child turns 21. That exemption belongs to those two forms of business and to no others. An S corporation does not get it, a C corporation does not get it, an LLC taxed as a corporation does not get it, and a child on a corporate payroll pays into Social Security and Medicare like every other employee, which changes the arithmetic but not the legitimacy of the underlying strategy.
What a defensible setup looks like is the same file any employee would generate. A written job description for work the business genuinely needs, suited to the child’s age and ability, timesheets kept as the hours happen, a wage set where the market would set it for the same tasks, payroll that actually runs on a schedule, and a W-2 at the end of the year. The pay has to match the hours, the hours have to match the work, and the work has to be visible in the business, because a wage that cannot be traced to labor is an allowance wearing a tax label.
These arrangements fail in unglamorous ways, and always at the same joint: substance. A child who never actually works, timesheets that do not exist, round numbers transferred whenever cash flow allows, pay out of proportion to anything a stranger would earn for the same job, none of it survives a question from an examiner, because the deduction was never really for wages. The rule at work is the same substance over label principle that governs owner salaries in the reasonable compensation cases, where what a payment is called gives way to what was done for it. The Tax Court applied that principle to family payroll decades ago in Eller v. Commissioner, accepting wages paid to young children where the services were genuinely performed and trimming them to what the work was reasonably worth, which is the whole doctrine in one holding: real work earns real wages, and the label carries nothing on its own.
The strategy asks for nothing exotic, a real job, a defensible rate, and the ordinary paper of employment, and it holds exactly to the extent the child’s job, hours, and pay exist on paper the way any other employee’s would. The record decides, here as everywhere, and the family payroll that survives review is the one an examiner can read like any other personnel file.
Ideas do not change your tax number, implementation does, and implementation is books kept current, records made at the time rather than reconstructed later, elections filed on time, and every position reported the way the return will one day have to defend it. That is the year round work a strategy actually requires, and on the strategies we implement we stand behind that work with audit defense. Reading about a strategy is step zero. The record is what decides whether it holds.
Yes. A business may employ the owner's children the same way it employs anyone else, deduct their wages as an ordinary business expense, and the children pay tax on the wages at their own rates. Nothing about the arrangement is aggressive, and the Tax Court has accepted wages paid to children when the services were real and the pay was reasonable. What the law does not accept is a wage in name only.
Only when the employer is the child's parent operating as a sole proprietorship, or a partnership in which every partner is a parent of the child, and only while the child is under 18. In those businesses the wages are also exempt from federal unemployment tax until the child turns 21. If the business is an S corporation, a C corporation, or an LLC taxed as a corporation, none of these exemptions apply and the child's wages carry payroll taxes like any other employee's.
Work the business would otherwise pay someone to do, suited to the child's age and ability, such as filing, cleaning, inventory, photography, social media, or modeling for marketing materials, paid at a rate in line with what an unrelated worker would earn for the same tasks. The same substance over label principle that governs owner salaries governs here: what a payment is called matters less than what was actually done for it.
A written job description, timesheets kept as the work happens, wages paid on a real schedule through actual payroll rather than as ad hoc transfers, a W-2 at year end, and pay that matches the documented hours at the stated rate. Paying into an account in the child's name keeps the trail clean. All of it should look exactly like the file the business would keep for any other employee.
Wages are earned income, so they are covered by the child's own standard deduction, which means earnings up to that amount typically produce no income tax for the child at all. The kiddie tax does not change this, because it applies to a child's unearned income such as investment earnings, not to wages actually earned from work.
The strategies on this page are general, and your return is not. A Tax Position Review looks at your real numbers and gives you a written Snapshot of where you stand, the findings worth acting on, and what each one depends on.
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