Hiring your kids in your business

Wages you pay your own child are deductible on exactly the terms that apply to anyone else on the payroll: the work has to be real, and the pay has to be reasonable for it. What is genuinely different is payroll tax, and that turns on the child's age and on how the business is organized.

The two tests the wage has to pass

Pay to an employee is deductible when it is an ordinary and necessary expense of the business, paid or incurred during the year, and when it clears two further tests. The amount has to be reasonable. And it has to buy services that were performed.

For a child those two tests do most of the work. Reasonable means measured against what a stranger would have been paid to do the same job, not against what the family needed to move that year. Services performed means the work happened and the business actually wanted it done. A payment made because the child is your child, with nothing behind it, fails both. Notice that neither test mentions an age.

Social security and Medicare: the under-eighteen rule

Here is the rule readers come for, with the condition that usually gets dropped. Where a child under eighteen works in a parent's trade or business, the wages are outside social security and Medicare tax — but only in two ownership shapes: a sole proprietorship, and a partnership whose every partner is a parent of the child.

Say that condition out loud before relying on it. The exemption belongs to that ownership shape and to nothing else.

Unemployment tax: the under-twenty-one rule

Federal unemployment tax carries the same ownership condition and a later age. In those same two shapes — sole proprietorship, or partnership with only the child's parents as partners — payments for a child under twenty-one sit outside the tax, whether or not the work is part of a trade or business. From twenty-one onward those payments are inside it again.

Income tax withholding does not go away

Income tax withholding follows a different pattern from the two taxes above. A child of any age working in a parent's trade or business is generally subject to it. The child is an employee, the employer paperwork that goes with an employee applies, and Form W-2 is part of it.

The useful half is what happens on the child's own return. A child who can be claimed as a dependent still gets a standard deduction, capped at the single amount, $15,750 for 2025. Wages below that ceiling generally leave no federal income tax to pay, even though money was withheld along the way, so the child usually files in order to get the withholding back. Who has to file sets out when a return is required rather than merely useful.

If your business is a corporation, this all changes

Incorporate, or take in a partner who is not the child's parent, and every exemption above disappears. In a corporation, in a partnership that is not all-parent, or in an estate, payments for a child's services carry income tax withholding, social security and Medicare tax, and federal unemployment tax, at any age at all.

That is worth pausing on, because it is a live cost. An S corporation election takes the payroll tax saving away, and it does so quietly. S corporation or sole proprietor weighs that choice on its other merits.

Work in the home is a different rule

Readers conflate these two, so keep them apart. Domestic work a child does in the parent's private home is outside income tax withholding, and outside social security, Medicare and federal unemployment tax until the child reaches twenty-one. That rule is not the trade or business rule above, and describing a business arrangement in its terms is how a family ends up defending something it never actually did.

Records that hold up

A written description of the job. Hours recorded as they are worked, not reconstructed in April. A rate you could defend if you were paying a stranger. Payment from the business into an account in the child's own name, rather than absorbed into household spending. And the employer filings kept with the rest of the payroll.

One last thing, because it comes up: putting a child on the payroll does not by itself change who claims that child as a dependent. Claiming dependents has the tests that do decide it.