Ways to Pay Your Kids (Legally) and Cut Your Tax Bill: The Family Payroll Playbook
If you’re paying your teenager’s phone bill, car insurance, or spending money out of your personal account, you might be missing a cleaner option: put them on the payroll (legitimately).
Done correctly, paying your kids can:
shift income from your high bracket to their low (or zero) bracket,
create a real business deduction, and
in some cases, reduce payroll taxes too (depending on how your business is structured).
Done incorrectly, it can look like a “family tax trick” with sloppy paperwork—exactly the kind of thing that creates audit friction.
Here’s how we do this the right way.
Why paying your kids can reduce your family’s overall tax bill
1) Your business gets a deduction for wages
When you pay an employee for bona fide work, wages are generally a deductible business expense (assuming the work is ordinary/necessary and the pay is reasonable). That reduces the business income that flows to you.
2) Your child may owe little to no federal income tax on those wages
For tax year 2026, the basic standard deduction for a single filer is $16,100.
If your child can be claimed as your dependent, their standard deduction is limited—but it can still be large enough that many part-time / summer earnings produce $0 federal income tax.
For tax year 2026, the dependent standard deduction can’t exceed the greater of:
$1,350, or
earned income + $450.
3) You may also save payroll taxes (in specific structures)
This is where the rules get very specific—and where a lot of bad internet advice goes wrong.
The non-negotiables: what makes this “legal” (and audit-resistant)
To pay your kids through your business safely, we want all of these to be true:
Real job, real work product
The work must be necessary to the business (admin, filing, cleaning office, photo/video for marketing, basic bookkeeping prep, inventory, etc.).Reasonable pay for the work performed
Pay what you’d pay someone else for similar work, given your child’s age and skills.Real payroll process (not a transfer)
Pay by payroll check or direct deposit, run through your payroll system, and issue tax forms.Documentation
Time logs, job description, pay rate support, and proof of payment. (If you ever need to defend it, documentation wins.)Child labor rules must be followed
Federal and state rules apply—even if it’s your business.
The most important factor: your business entity type (Schedule C vs S-corp)
Payroll tax treatment for your child depends heavily on how your business is taxed.
Family employee payroll tax rules (high level)
| Business type | Child’s age | Social Security & Medicare (FICA) | FUTA (federal unemployment) | Key note |
|---|---|---|---|---|
| Sole proprietorship (Schedule C) | Under 18 | Generally not subject | Under 21: generally not subject | Must be parent’s business |
| Partnership | Under 18 | Generally not subject only if every partner is a parent | Under 21: generally not subject only if every partner is a parent | Mixed-owner partnerships lose the break |
| Corporation (including S-corp) | Any | Generally subject | Generally subject | Child is employee of the corporation, not the parent |
Bottom line:
If you’re a Schedule C (or qualifying parent-only partnership) and your child is under 18, there’s a potential payroll tax advantage in addition to the income-shifting benefit.
If you’re an S-corp, the strategy can still work, but expect standard payroll taxes to apply.
Step-by-step: how to pay your kids the right way
Step 1: Pick age-appropriate, business-related work
Examples I commonly see done correctly:
Office cleaning, shredding, scanning, filing
Updating CRM contacts, basic admin tasks
Product labeling, inventory counts
Social media help (photos, simple edits, posting drafts)
Light website tasks (uploading blog posts, formatting)
For rental owners: turning units, landscaping coordination, supply runs, showing prep (must be real and documented)
Step 2: Set a reasonable rate and schedule
Use an hourly rate that matches the local market for similar work.
Use a consistent schedule (e.g., 5–10 hours/week).
Step 3: Follow worker classification rules (employee vs contractor)
Most kids working inside a parent-run business are W-2 employees because the business controls what they do and how they do it.
(If you try to 1099 them when they’re clearly being supervised like an employee, you can create payroll tax exposure.)
Step 4: Run payroll (paperwork included)
At minimum:
Form W-4 (federal withholding)
Form I-9 (work eligibility verification)
State withholding setup (Virginia employers generally must withhold VA income tax when federal withholding applies).
Withholding tip:
If your child expects no federal income tax liability, they may be able to claim “exempt” from federal withholding on Form W-4 if they meet the IRS conditions.
Step 5: Pay them like a real employee
Pay by direct deposit or payroll check from the business account.
Avoid “netting” payments against personal expenses with no payroll trail.
Step 6: Keep documentation (this is what makes it defensible)
Keep:
Job description (one page is fine)
Time sheets
Samples of work (before/after photos, social posts drafted, files scanned)
Payroll reports + W-2/W-3 copies
Step 7: Make sure you comply with labor rules (especially with teens)
Federal: Children of any age are generally allowed to work in a business owned entirely by their parents, but there are limits—especially around manufacturing, mining, and hazardous occupations.
Virginia: If you employ a 14- or 15-year-old, Virginia requires an Employment Certificate before they perform work.
Real-world example: what the savings can look like
Scenario:
You’re a profitable Schedule C business owner and you’re already in a high bracket. You hire your 15-year-old for legitimate admin + marketing help and pay $14,000 in 2026.
Child’s federal income tax
Because your child is likely your dependent, their 2026 standard deduction is limited to the greater of $1,350 or earned income + $450.
Earned income: $14,000
Dependent standard deduction: $14,000 + $450 = $14,450
Taxable income: $14,000 – $14,450 = $0 federal taxable income
Parent’s federal tax impact (illustrative)
That $14,000 wage expense reduces business income. If your marginal federal rate is 37%, that’s roughly:
$14,000 × 37% = $5,180 income tax reduction (simplified illustration)
Because this is a Schedule C business, reducing profit may also reduce self-employment tax exposure (fact-specific), and—critically—wages paid to a child under 18 in a parent’s sole proprietorship are not subject to Social Security/Medicare, and under 21 they’re not subject to FUTA.
Takeaway: This is one of the few “family strategies” that can be both common-sense and high impact—when it’s done with clean payroll and documentation.
Bonus move: use your child’s earned income to fund a Roth IRA
Once your child has earned income, they may be eligible to contribute to a Roth IRA (subject to the normal IRA rules).
For 2026, the IRS announced the IRA contribution limit increases to $7,500.
This can be a powerful “double win”:
You deduct the wage expense (business benefit)
Your child starts tax-advantaged investing early
Common mistakes I see (and how to avoid them)
Paying for non-business chores
Household chores are not business wages.Overpaying for simple tasks
If you pay $30/hour for basic filing, it looks like a disguised gift.Skipping payroll and “just transferring money”
No payroll record = weak position if questioned.Ignoring youth employment rules
In Virginia, 14–15 year olds need an Employment Certificate.Using a 1099 when the facts look like W-2 employment
Worker classification depends on control/independence factors.Forgetting the S-corp nuance
Corporations generally do not get the under-18/under-21 payroll tax exemptions for children.
FAQ
Can I pay my kid if I have an S-corp?
Yes—but expect wages to be subject to Social Security/Medicare and FUTA, because the child is considered an employee of the corporation.
Do I have to withhold federal income tax from my child’s paycheck?
Wages paid to a child are generally subject to income tax withholding rules.
However, if your child qualifies, they can claim “exempt” from withholding on Form W-4 under IRS rules (no tax liability last year and expect none this year).
Does the “kiddie tax” apply to wages?
The kiddie tax is aimed at unearned income (like investments), not wages for work.
Does my child need to file a Virginia return too?
Virginia generally requires a return if the child is required to file federally and Virginia AGI meets the state thresholds (and filing can also be needed to claim a refund of withholding).
What about adult children (18+)?
You can hire them the same way you’d hire anyone else. The payroll tax exemptions for minor children generally won’t apply, but the wage deduction and income-shifting can still be valuable if the work and pay are legitimate.
Call to Action
If you want to use this strategy, I recommend doing it with a clean setup (job description + payroll + documentation) so it holds up under scrutiny.
Download: Family Employment Compliance Checklist (job descriptions, time tracking template, payroll setup steps)
Book a planning call: Let’s review your entity type and design a family payroll plan that fits your situation.
Book here: Contact Us
Disclaimer: This article is for educational purposes only and does not constitute tax, legal, or accounting advice. Consult with your tax advisor before implementing any strategy discussed here.