Reviewed and updated October 16, 2026
Create a genuine employment arrangement
Your child must perform actual services appropriate to their age and ability. Document the job, hours, tasks completed, pay rate and payment. Compensation should be reasonable for the work, not an amount chosen only to match a deduction target.
Keep ordinary household chores separate from business services. Pay through a traceable process and retain work examples where practical. Federal and state child-labor rules still need to be considered.
The payroll exception depends on the employer
For a parent’s sole proprietorship, or a partnership in which every partner is a parent of the child, wages to a child under 18 are generally exempt from Social Security and Medicare taxes. The federal unemployment-tax exception generally applies before age 21. Income-tax withholding rules remain relevant.
If the employer is a corporation, these family-employment exceptions generally do not apply merely because the parent owns the company. An LLC requires classification-specific review. Do not copy a sole-proprietor strategy into an S corporation payroll without checking the rules.
Coordinate both tax returns
The employer’s deduction and the child’s filing requirements are separate questions. The child’s other earned or unearned income can affect the return; do not promise that a standard deduction makes all payments tax-free. Any IRA contribution requires qualifying compensation and compliance with annual limits.
Before hiring, discuss entity type, age, job duties and payroll setup with your preparer. Keep timesheets and payment records with the business books, and issue the required wage statements. A documented employment arrangement supports accurate reporting and helps the family make a sound decision.
Official sources
This guide provides general information. The rules depend on the tax year, jurisdiction and your circumstances. Ask our team which filing or planning steps apply to you.
