Tax-Savvy Tips (1) - Hiring Your Children

Want to reduce your tax burden while giving your children valuable work experience? Legally employing your children in your business not only provides tax benefits but also helps them develop responsibility and workplace skills. This article summarizes the key points you need to know to make informed decisions.

1. Tax Benefits

Employing your children in your business can offer significant tax savings. Their wages can be deducted as business expenses. If the business is a sole proprietorship owned by one parent, a single-member LLC (SMLLC), or a partnership owned by both parents, children under 18 are exempt from Social Security and Medicare taxes. For personal income tax purposes, children can earn up to $15,000 per year (2025) tax-free. Earnings above this amount are taxed at the applicable rate.

Once children turn 18, they are required to pay FICA taxes for Social Security and Medicare. However, their income remains exempt from federal unemployment tax (FUTA) until they turn 21.

2. W-2 vs. 1099

Different payroll reporting methods affect tax responsibilities, so choosing the right one is important.

• W-2: The preferred method, as neither you nor your child pays Social Security or Medicare taxes. No unemployment taxes apply, and if wages are below $12,950 (2022), no income tax is owed.

  
  

• 1099: Your child must pay self-employment taxes.

  
  

• Implications of choosing 1099: As a general rule, anyone classified as an employee—including your child—should receive a W-2. If your child is over 18 and you decide to treat them as an independent contractor for tax purposes, you must issue a 1099-NEC (if you paid $600 or more). Treating your child as an independent contractor means you do not withhold income tax from their paycheck, nor pay the employer portion of Social Security and Medicare taxes. Instead, they are responsible for self-employment taxes. It also means you do not directly manage them or their work. Misclassifying an employee as an independent contractor can create legal and tax risks for you as a business owner.

3. Business Structure

The type of business also affects how your child’s wages are taxed.

• Sole proprietorship / LLC (disregarded entity): Children under 21 are exempt from payroll taxes (i.e., a single-member LLC taxed as a sole proprietorship or an LLC owned by a married couple).

  
  

• C corporations, estates, or partnerships (unless every partner is a parent of the child): Regardless of age, Social Security, Medicare, and FUTA taxes must be withheld.

  
  

• S corporations: Social Security, Medicare, and unemployment taxes apply to children employed by the business.

4. Compliance and Documentation

To legally employ your children, you must follow regulations and keep proper records.

• Children must be legitimate employees performing real work essential to the business. States have no uniform minimum age for wages.

  
  

• Pay reasonable wages supported by industry standards. Keep detailed records of hours worked and tasks performed (using timesheets, apps, or spreadsheets). If possible, draft a contract outlining responsibilities. Children’s duties should relate only to the business—not personal chores like housework or mowing the lawn.

  
  

• Legal requirements: Complete IRS Form W-4, Form I-9, obtain an Employer Identification Number (EIN), and issue a W-2 annually.

  
  

• Confirm your state’s child labor laws to ensure your child meets age requirements and works within regulated hours. For example, in Georgia, 14- to 15-year-olds may work 3 hours on school days and 8 hours on non-school days. During the school year, teens can work up to 18 hours per week, and up to 40 hours per week during summer. Additionally, minors in Georgia cannot work before 7 a.m., after 7 p.m. (extended to 9 p.m. from June 1 to Labor Day), or during school hours.

5. Risks of Abuse

Improper use of tax benefits can lead to legal and tax risks. The IRS monitors hiring children for tax advantages. If the employment arrangement lacks substance or is considered abusive, deductions may be disallowed. Follow the rules to ensure your child’s employment is legitimate and meets real business needs.

6. Alternative Business Structures & Risks

Some business owners consider alternative structures, but compliance and IRS scrutiny must be considered.

• Exploring alternatives: Some small business owners use sole proprietorships or family management companies (FMCs) to avoid S corporation payroll tax restrictions.

  
  

• IRS scrutiny: Using alternative structures solely to evade taxes can attract IRS attention. The business must have a legitimate purpose, not just a tax strategy.

  
  

• Example case: An LLC owner taxed as an S corporation attempted to switch to a sole proprietorship to exempt children’s wages from payroll taxes. Because business operations remained the same, the change was difficult to justify. Courts ruled such abusive arrangements invalid.

Conclusion

Employing your children can improve family business efficiency and save taxes, but it must be legal, reasonable, and aligned with business needs. By following the rules and keeping detailed records, you can ensure your child’s work is valuable and safe. This approach not only provides tax benefits but also gives your children valuable work experience.