Putting Your Kids on Payroll: The Rules That Make It Legitimate

You have heard the pitch at some seminar: hire your kids, deduct the wages, pay them tax free, fund a Roth IRA, watch it compound. Every piece of that is real. What the pitch leaves out is that the strategy lives or dies on facts you have to create before anyone asks for them, and the two most common versions of it collapse on contact with an examiner. Putting your kids on payroll is legitimate. Sloppy payroll for your kids is a deduction waiting to be disallowed.

Start With the Number That Drives Everything

For tax year 2026, the standard deduction for a single filer is $16,100. A dependent child with only wage income gets to use it against those wages. So the first $16,100 your child earns carries no federal income tax at all, and the kiddie tax does not touch it, because kiddie tax applies to unearned income.

Meanwhile the wages come off your Schedule C, which drops both your income tax and your self-employment tax. Run a 15-year-old at $12,000 for real work in a sole proprietorship, owner in the 24% bracket:

That last line is not a loophole. It is income taxed once, in the hands of the person who earned it, at her rate instead of yours.

Your Entity Type Decides Whether the Payroll Break Exists

This is where most of the seminar version falls apart. The FICA and FUTA exemptions only exist for unincorporated businesses owned by the child’s parents.

The authority is Section 3121(b)(3)(A) for the FICA side and Section 3306(c)(5) for FUTA. Note what stays constant across every row: payments for a child’s services are subject to income tax withholding regardless of the child’s age. The exemption is from payroll tax, not from being an employee. If you run an S corp, the strategy still works, it just costs 15.3% more.

Age Thresholds, Including the Ones That Are Not Tax Rules

Three thresholds matter federally: under 18 for the Social Security and Medicare exemption, under 21 for FUTA, and any age for income tax withholding.

Labor law runs on a separate track. The Department of Labor’s parental exemption is broad: when parents are the sole owners of the business, they may employ their own child at any time of day, for any number of hours, and in any occupation other than manufacturing, mining, or work declared hazardous. There is no federal minimum age for a parent-owned business outside those categories. What the exemption does not do is override state child labor rules or compulsory school attendance, so Florida owners should confirm state requirements before building a schedule around it.

The practical age floor is not legal, it is evidentiary. A seven-year-old can plausibly appear in marketing photos. A seven-year-old cannot plausibly earn $12,000 doing data entry, and that is the version that gets adjusted.

Documentation Is the Entire Defense

Three tests decide the deduction: the child performed actual services, the child was actually paid, and the pay was reasonable for the work. Build the file as you go.

• A written job description and an hourly rate you could justify by pointing at a job listing for the same work
• Contemporaneous timesheets showing dates, hours, and tasks, kept as the work happens rather than reconstructed in March
• Form W-4 and Form I-9 on file, same as any other hire
• Real payroll: Form 941 each quarter, Form W-2 and W-3 by January 31, wages on the same schedule as everyone else
• Actual money moving by check or transfer into an account in the child’s name

Two habits sink otherwise fine arrangements. Paying for household chores, which is not a business expense no matter how the ledger is labeled. And paying a lump sum every December, which is a distribution wearing a costume.

The Roth IRA Is the Part Worth the Trouble

A Roth IRA requires earned income. W-2 wages are earned income. Allowance, gifts, and investment income are not. Payroll is the gateway.

For 2026 the contribution limit is $7,500, capped at the child’s earned income. Open a custodial Roth, contribute up to the lesser of the two, and let time do the rest. Fund $7,500 a year for four years starting at age 15, assume 7% annually, and by 65 those four contributions are worth roughly $800,000, all of it tax free on the way out. Total contributed: $30,000.

The money does not have to come from the child’s own paycheck either. Parents can gift the contribution amount as long as the child has the earned income to support it, which lets the wages fund a car or college while the Roth still gets filled. For how that compares to what you are setting aside for your own retirement, see our comparison of solo 401(k), SEP IRA, and defined benefit plans for business owners.

Where This Actually Goes Wrong

Nobody gets caught because they hired a 14-year-old. They get caught because there is no timesheet, the entity was an S corp the whole time, or the “salary” was $20,000 for a job that pays $14 an hour. The strategy is durable. The shortcuts are not.

If you are running a business in South Florida and want your family payroll set up so it holds up years from now, OliRam Advisors handles entity structure, payroll compliance, and the documentation that makes putting your kids on payroll defensible rather than merely aggressive.