You Can Pay Your Kids Through Your Business. But Only If You Do It Right.

Heads up: This post is for educational purposes only. It is not tax or legal advice. Before setting up any payroll structure, talk to your CPA. Every business situation is different and the rules here have real compliance implications.

 

Someone asked me about this last week. She owns an S corp, has a couple of kids, and heard on TikTok she could hire her kids and save money on taxes. She wanted to know how.

That’s the kind of sentence that sounds easy until you actually try to do it. Then suddenly you’re elbow deep in tax paperwork and questioning every life choice that led you here.

The short answer: yes, you can hire your kids through your business. But the way most people try to do it doesn’t actually work. And the version that does work requires a very specific setup, which, naturally, is the part nobody mentions on TikTok.

Here’s the full breakdown.

The problem with hiring your kids through your S corp

If you own an S corp and you just add your child to payroll, you do not get the payroll tax savings most people are hoping for. Here’s why.

The IRS has a rule that W-2 payroll (wages) paid to a child is exempt from Social Security and Medicare taxes (FICA), but ONLY when the employer is a sole proprietorship or a parent-only LLC. A corporation doesn’t get that treatment. And an S corp is a corporation, which is the IRS’s very polite way of saying, “nice try.”

That doesn’t mean there’s no point to it, yes, your kids can be employees. No, that does not magically turn your S corp into a tax hack. You still get the wage deduction, and your child’s wages are taxed at their rate instead of yours, which is helpful. But the big payroll tax win people are chasing? Gone.

How to hire your kids through your business and ACTUALLY save on taxes

Think of it this way: your S corp is a locked door for this IRS rule. A single-member LLC you own personally is the key. Same human, different tax box, wildly different result.

The catch is entity type. The IRS only offers this exemption to sole proprietorships, single-member LLCs, and partnerships where every partner is the parent. The moment you’re operating as a corporation (including an S corp) the door slams shut and the tax savings walk out.

Here’s how the structure works:
1. You open a separate single-member LLC, owned by you personally, not through the S corp.
2. The LLC provides real, documented services to your S corp.
3. Your S corp pays the LLC a reasonable fee for those services. Reasonable means “defensible,” not “look how cleverly I moved money around.”
4. The LLC pays your children wages for actual work.
5. Because of how the IRS classifies that LLC, wages paid to children under 18 aren’t subject to FICA tax.

The money flows like this: S corp pays the LLC, LLC pays the kids, and everyone pretends this started as a simple tax question and not a mini business infrastructure project.

How much can you pay your kids before taxes kick in?

The payroll tax exemption (FICA and FUTA — Federal Unemployment Tax Act) is based on the child’s age, not the dollar amount. The income tax question is separate, and that’s where the standard deduction comes in.

 

Here’s how it breaks down by age:

Child’s Age	FICA (SS & Medicare)	FUTA (Federal Unemployment Tax)	Federal Income Tax
Under 18	Not owed	Not owed	Only if wages exceed standard deduction
Ages 18-20	Owed	Not owed	Only if wages exceed standard deduction
21 and older	Owed	Owed	Only if wages exceed standard deduction

For federal income tax: your child, like any other taxpayer, gets a standard deduction — $16,100 for single filers in 2026. Depending on your child’s total income from all sources and their specific tax situation, wages under that threshold may result in little or no federal income tax owed. Check with your CPA for your exact situation.

One thing I’m not including details on: state income taxes. Every state handles this differently, and some have no income tax at all. Check with your CPA on what applies in your state before assuming the full picture looks the same at the state level.

What work can they actually do?

This is where a lot of people get tripped up. The jobs have to be real, documented, and appropriate for the child’s age and skill level. And just to be clear: this is W-2 payroll — not 1099 contractor pay and not random transfers from the business account. If you’re paying your kid, but you’re not running payroll, you’re not really doing this strategy. The IRS is looking for actual wages, actual work, and an actual paper trail, not a “we moved some money around and hoped for the best” situation.

The IRS isn’t going to stop you from paying your seven-year-old $14,000 a year. They’re just going to ask what exactly your seven-year-old did to earn it. And “helped out around the office” might not cut it.

The good news: there’s actually a lot of legitimate work kids can do across most business types.

Here’s a starting list:

• Organizing samples, supplies, or inventory
• Social media management and content creation
• Modeling merchandise (product-based businesses)
• Stuffing mailers or assembling materials for client packets
• Filing, sorting paperwork, or scanning documents
• Answering phones during business hours
• Helping at trade shows, showrooms, or client events
• Calling leads or following up with prospects

Keep a log: what they did, when, how long. Pay via direct deposit from the LLC’s account. Issue a W-2 at year end. The IRS expects this to look like actual employment, because it needs to be.

What this costs to set up

Less than you’d think, and less than what you’d pay to fix it if you set it up wrong. Here’s what you need:

• A new single-member LLC (formation cost varies by state)
• A separate bank account for the LLC
• W-2 payroll set up through the LLC
• A separate tax return for the LLC
• A service agreement documenting what the LLC provides to the S corp and at what rate

None of this requires a complicated operation. It just needs to be done correctly and consistently. The structure only works if it looks real – because it needs to be real.

Where Solvency Now fits in

We’re not a CPA firm and we don’t give tax advice. But if you want help getting this structure set up and running, we can handle most of the operational pieces.

Here’s what we can do:

• LLC formation: We can help you open the LLC. Pricing varies by state.
• Bank account: We can handle the account setup for the LLC using the information we already have from onboarding. The only thing you’ll need to do yourself is a quick identity verification step on your end.
• Payroll: We can set up a separate QBO payroll file for the LLC so your S corp payroll and your kids’ payroll stay completely separate from day one.
• Bookkeeping: If the LLC needs its own books, we handle that too — same flat-rate model, clean monthly records, everything your CPA needs at year end.

The goal is to make sure the structure actually works the way it’s supposed to — not just on paper, but in practice.

Need help getting your books clean before tax season? Click here to schedule a 15 minute consultation. We’ll give you a straight answer.

 

Frequently asked questions

Can I hire my kids through my S corp directly?

You can. The IRS will even let you do it. But you won’t get the FICA exemption that makes this strategy worth the trouble. An S corp is a corporation, so the special child-wage rule doesn’t apply.

Does the LLC need to actually make money on its own?

Yes. The LLC needs real income from the service fee your S corp pays it. You can’t just create an LLC, wave at it, and call it a strategy. It needs documented services, a reasonable fee, and a paper trail that makes sense to a human being and, ideally, to the IRS.

What if my kids are older than 18?

Then the easy payroll tax part starts disappearing. Under 18 gets the FICA break, under 21 gets the FUTA break, and after that they’re treated like normal employees for payroll tax purposes. At that point, you’re still paying them for real work, but the tax magic wand is mostly gone.

Do I need a separate bank account for the LLC?

Yes. Separate account, separate payroll, separate books, separate everything. If you mix the money together, the whole setup starts looking less like a business structure and more like a drawer full of receipts and optimism.

Does my child have to file a tax return?

Usually, yes, if they receive a W-2. Even if they don’t owe much or any federal income tax, filing keeps things clean and helps match what was withheld. Also, it prevents the IRS from wondering why a child has income but no return, which is a conversation nobody wants.

How does Solvency Now help with this?

We can help with the operational pieces: LLC formation, bank account setup, separate payroll, and bookkeeping. We’re not tax advisors, but we can make sure the whole thing is set up cleanly so your CPA doesn’t open the file and immediately need a second coffee (or something stronger).

 

Maya Weinreb Maya Weinreb is the founder and CEO of Solvency Now, a remote bookkeeping and financial operations firm serving growing businesses across the US. Solvency Now provides outsourced bookkeeping, QuickBooks cleanup, payroll, accounts payable and receivable management, and financial operations support for service-based businesses, e-commerce companies, professional services firms, and more. solvencynow.com

 

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