Paying your children through your business is one of the few tax strategies that works at almost any size. It is also one of the most commonly botched. The version circulating on social media skips the parts that make it hold up — and those are the parts an auditor asks about first.
How much you save depends almost entirely on which entity signs the paycheck. Change that one field and watch everything else move. Nothing you enter here is saved or sent anywhere — and the result is an educational estimate, not tax advice for your situation.
These change every year with inflation. Nothing here is hard-coded, so this page does not go stale — put in the current figures and it stays correct.
The headline is the model we use in planning meetings. These three adjustments make it precise. They always reduce the number, and never enough to change the decision.
| Structure | Net annual saving |
|---|
Wages paid to your child under age 18 are exempt from Social Security and Medicare tax, but only when the employer is a sole proprietorship or a partnership owned solely by the child’s parents. Wages are also exempt from federal unemployment tax until the child turns 21. An S corporation or a C corporation gets neither exemption, even when you own all of it.
That is the whole reason for the structures below. If your business is already a Schedule C or a parent-only partnership, you are done reading the structural part. If it is a corporation, you need one more piece.
Put your child on the payroll of the business you already run. Nothing else is required. This is the simplest route and it produces the largest saving, because the wage reduces income subject to both income tax and self-employment tax.
Many owners already have a second activity: a rental LLC, a consulting side business, a farm. If that entity files a Schedule C or a family partnership return, hire the children there instead of building anything new. Fewer moving parts is always better.
We recommend this over route 3 whenever it fits. Check that the work you are paying for genuinely belongs to that activity.
Form a new sole proprietorship that you own. Your corporation hires it to perform a real, specific service. The sole proprietorship hires your children to do that work and pays out what it takes in, so it earns no profit. Because your children’s employer is now your sole proprietorship, the payroll tax exemption applies to their wages.
This route asks more of you than a direct hire. The exemption holds because your sole proprietorship is genuinely your children’s employer, so the service company needs a real service, a rate you can support with a comparable quote, an invoice every month, and its own bank account. Treat it as a business rather than a bookkeeping entry and it holds up.
Sales tax can be a factor here. Depending on your state and the service, the fee your corporation pays the service company may be a taxable sale, which cuts further into the saving. Check how your state treats the service before you set the fee.
Every question an examiner asks reduces to two things. Did the child actually do the work? Was the pay reasonable for that work? Get both right and the rest is bookkeeping.
The task has to be something the business genuinely needs and would otherwise pay someone to do. It also has to be age appropriate. A seven-year-old can appear in a photograph and can shred paper. A seven-year-old cannot manage your books.
| Age | Work that holds up | Work that does not |
|---|---|---|
| 6 to 10 | Appearing in photos and video for advertising; shredding; stuffing and stamping mailers; simple sorting; cleaning the shop or office | Anything requiring judgment, driving, tools, or access to customer data |
| 11 to 14 | Filing and scanning; washing vehicles and equipment; jobsite and yard cleanup; inventory counts; light assembly; running the phone camera for content | Payroll, bookkeeping, contracts, anything on a ladder or a machine |
| 15 to 17 | Data entry; social media production and scheduling; customer email and scheduling; deliveries where legal; basic bookkeeping entry; light installs | Hazardous occupations, which are barred under 18 regardless of who owns the business |
Reasonable means what you would pay an unrelated person for the same task. Set the rate first, then let the hours produce the total. Working backward from the standard deduction and dividing is how a good position becomes a bad one.
| Task | Common rate basis | What documents it |
|---|---|---|
| Vehicle and equipment cleaning | Per vehicle, or hourly at local detail rates | Detailer quote or posted price list |
| Filing, scanning, data entry | Local clerical hourly rate | Job posting for a file clerk |
| Jobsite and shop cleanup | Local general labor hourly rate | Your own labor rate for helpers |
| Social media content production | Per finished post, or hourly | Freelancer quote for the same deliverable |
| Likeness in advertising | Annual contract, priced off a model or stock license | Stock license price sheet or photographer quote |
You can do the version you see on social media and risk having it thrown out on audit, or you can frame it up so it stays effective. Here is what the first version looks like.
| The mistake | The fix |
|---|---|
| Paying children straight out of the S corporation | Route the wages through a sole proprietorship you own. The most expensive error, and the easiest to fix. |
| No work, or work invented after the fact | Pick tasks the business actually needs. Write them down before the first shift. |
| Working backward from the standard deduction | Set a defensible rate, then let real hours produce the total. If the honest number is $6,000, take $6,000. |
| Paying by 1099 | Issue a W-2. A 1099 makes your child self-employed and adds 15.3 percent in self-employment tax. |
| The money never leaves the parent’s account | Open an account in the child’s name and transfer real money on a real schedule. |
| Wages spent on ordinary parental support | Spend it on the child’s own goals: Roth, college savings, activities, tuition. |
| Round numbers with no timesheet | Log hours contemporaneously. Uneven totals are a feature, not a problem. |
| Set up in year one, abandoned in year two | Calendar the payroll filings, or hand the payroll to us. |
| A likeness agreement with no advertising | If you are paying for their likeness, run the ads and save the creative. |
A defensible version of this strategy runs on documents: a job description you could post, an employment agreement, a services agreement if a corporation is involved, timesheets, and W-2s filed every January. We draft the agreements, pull the EIN, set up the payroll, and file the W-2s — so the version you run is the version that survives an audit.
Book a consultationRed Door Taxes was founded after I was taken advantage of by a lazy and unscrupulous tax preparer when I was a new business owner. The preparer explained nothing about business ownership, write-offs, business structure, or how to avoid a big tax bill at the end of the year. I was so frustrated with the experience that I enrolled in accounting classes so that I could prepare my own taxes. I have been preparing taxes professionally since 2011 and have been an enrolled agent since 2017.
Ryan of Red Door Taxes is the best tax preparer I have ever used. He provides professional, knowledgeable service that inspires confidence. I have relied on him for years and highly recommend him for both business and personal tax needs.
Ryan has been doing our taxes for a few years now. He takes the time to understand our family goals and uses his expertise to ensure our returns are tailored to our needs. You simply can't go wrong with Ryan; he has earned our highest recommendation!
As an Enrolled Agent, Ryan is extremely knowledgeable about the specific deductions our family was eligible for and helped us navigate tax implications from home sales and investments. He answered all our questions, referencing the applicable rules, and provided future planning advice.
For educational purposes only. This page and its calculator are general education for business owners — not tax, legal, or accounting advice for your specific situation — and reading it does not create a client relationship with Red Door Taxes. The calculator estimates federal tax only. It ignores state income tax and the passive activity rules that may defer a loss from a rental activity. The payroll tax exemption ends when a child turns 18, and the unemployment tax exemption at 21. Your entity, your state, and the current year’s inflation-adjusted amounts all change the result. Nothing you enter in the calculator is saved or transmitted. Bring us your facts before you act on any of it.
