Hiring Your Kids in Your S-Corp: Tax Math, FICA, and Roth IRA

#The income-shifting math when you pay your kids

The strategy starts with one fact: the U.S. tax system lets you move income from your high bracket to a child who may owe $0 in federal taxes.

In 2026, a dependent child can claim a standard deduction equal to their earned income plus $450, up to the single-filer standard deduction of $16,100. That means a child earning $15,650 in wages owes $0 in federal income tax, because $15,650 + $450 equals the $16,100 standard deduction and nothing is left over as taxable income.

Here is what that looks like for a parent whose S-corp is in the 32% federal bracket:

• S-corp keeps $15,000: Federal income tax at 32% = $4,800 owed
• S-corp pays $15,000 to child: Child’s federal income tax = $0

The deduction flows through the S-corp and reduces K-1 income to the parent. The income lands in the child’s hands at zero federal cost. That is the core of the strategy before you account for FICA, which we get to next.

#What counts as the child’s “earned income”

Only wages from real work qualify as earned income. Passive income, dividends, interest, and gifts don’t count. The child must be a genuine employee performing real services.

This matters for two reasons. First, the standard deduction shelter only applies to earned income, not unearned income. Second, only earned income creates eligibility to contribute to a Roth IRA. A child receiving a “distribution” from the business instead of a paycheck gets neither benefit.

#The 0% and 10% bracket on wages above the standard deduction

If you pay your child more than $15,650, the overage is taxable at their marginal rate. For most children with no other income, that starts at 10% federal, then 12%. That is still a steep drop from the parent’s 32% or 37% bracket.

A child earning $20,000 would owe federal income tax on $3,900 ($20,000 minus the $16,100 standard deduction) at 10%, or about $390 in federal tax. The income-shifting math still wins by a wide margin.

#State income tax on top

Most states have their own income tax, and your child owes state tax on wages just like any other employee. States with no income tax (Texas, Florida, Nevada, and a few others) make this strategy even cleaner. Factor in your state’s rate when you model the full picture.

#The FICA catch most S-corp owners don’t see coming

This is the piece most blog posts skip. It is also the part that most changes your net savings number.

IRC §3121(b)(3) exempts wages paid to a child under 18 from FICA taxes (Social Security and Medicare) when the employer is:

• A sole proprietorship owned by one or both parents, OR
• A partnership where every partner is a parent of the child

That exemption does not apply to an S-corporation. An S-corp is a separate legal entity. The IRS treats the corporation as the employer, not the parent. So the exemption built for family businesses does not follow you into the corporate structure.

What this means in practice: when your S-corp puts your 15-year-old son on payroll at $15,000 per year, the corporation must withhold and match FICA exactly as it would for any unrelated employee.

#The FICA cost on $15,000 of child wages

The numbers break down this way:

• Employee share (withheld from child’s paycheck): $15,000 × 7.65% = $1,148
• Employer share (paid by the S-corp): $15,000 × 7.65% = $1,148
• Total FICA cost across the family unit: $2,295

The employer FICA ($1,148) is deductible by the S-corp. At a 32% bracket, that deduction saves another $367. Net FICA cost to the family: roughly $1,928 after the employer-side tax benefit.

The income-shifting saves $4,800 in parent income tax. The FICA costs approximately $1,928 net. Net tax savings: approximately $2,870.

That is real money. And unlike the sole-prop structure, there is no way around it inside the S-corp itself without additional planning.

#How sole proprietors have an edge here

If your business is a sole proprietorship or a parent-only partnership, you pay the same $15,000 and owe $0 in FICA. The full $4,800 in bracket savings stays in the family. That is a $2,295 cost advantage over the S-corp structure on the same $15,000 of wages.

Some business owners stay as sole proprietors specifically to keep the §3121(b)(3) exemption for their kids. For most S-corp owners, the SE-tax savings from the S-corp structure on owner wages far exceed the FICA cost on child wages. The two strategies still combine for a strong result. But you should know the trade-off exists.

Note that FUTA taxes on child wages also don’t carry the §3121(b)(3) exemption inside an S-corp. Under IRC §3306(c)(5), the FUTA exemption for children is also limited to sole proprietorships and qualifying partnerships. Your S-corp owes FUTA on your child’s first $7,000 of wages (typically $42 per child after the state unemployment tax credit). Small, but worth knowing.

#Age and job rules the IRS expects to see

There is no minimum age in the tax code for hiring a child. But the IRS and courts apply a reasonableness standard: the work must match what the child is actually capable of doing, and the wages must match what a third party would pay.

#Jobs that hold up at audit by age range

A reasonable job assignment depends on the child’s age and demonstrated ability:

• Ages 7 to 11: Simple, repetitive tasks. Filing physical documents, labeling envelopes, organizing supply closets, shredding paper, tidying the office.
• Ages 12 to 15: Social media support (photographing products, writing basic captions), data entry, website content updates, basic video editing, organizing business receipts.
• Ages 16 to 17: More complex marketing tasks, bookkeeping data entry, customer-facing phone support, event coordination assistance, graphic design with demonstrated skill.
• Ages 18 and up: Any role a third-party employee could fill at a comparable wage. Less scrutiny from the IRS at this age, but the reasonable-wage standard still applies.

#Reasonable wages tied to market rates

Wages must reflect what an unrelated third party would earn for the same work. You cannot pay your 13-year-old $50 per hour for social media work that a freelancer on Upwork would do for $15 per hour.

Pull actual rates from:

• Upwork or Fiverr listings for comparable freelance tasks
• Local high school job postings for entry-level work
• Department of Labor wage data for your region and role type

Document that research and keep it in the child’s employee file. It is your defense if the IRS questions the pay rate.

#The “real work” test

The IRS has denied child employment deductions when:

• No time records existed to show when and how long the child worked
• No work product could be produced to show what was done
• The child was too young to plausibly perform the described tasks
• Pay went to a parent-controlled account the child never actually accessed

The fix is simple: keep timesheets, keep samples of the work output, and pay the child with an actual check or direct deposit to an account in the child’s own name.

#Documentation that defends this strategy at audit

The employment arrangement needs paperwork that looks like any other W-2 relationship. Thin documentation is the most common reason this strategy collapses at audit.

#What to keep in the child’s employee file

Maintain a file for each child on payroll with:

• Written job description: Title, specific duties, reporting structure, expected weekly hours
• Timesheets or work logs: Date, tasks performed, hours worked. Weekly entries beat reconstructed monthly estimates.
• Work product samples: Screenshots of posts published, copies of documents filed, photos of tasks completed
• Payroll records: Pay stubs or payroll run confirmations from your payroll provider for each pay period
• W-2 at year-end: Issued by the S-corp just like any other employee’s W-2
• Evidence of payment: Bank statements showing deposits into the child’s personal account

#Run payroll like you do for any employee

Your child gets processed through your regular payroll system on a regular schedule. If you already use Gusto or another provider for your S-corp owner W-2 (the Gusto setup walkthrough covers this in detail), add your child as a new employee in the same system.

The IRS views year-end lump payments with extreme skepticism. Running payroll biweekly or monthly throughout the year looks like genuine employment. One large payment in December with no pay stubs from earlier months does not.

#Wages must pass the reasonable compensation test

Child wages face the same scrutiny as owner wages. We run reasonable compensation benchmarks for S-corp owners, and the same principle applies here: document what a third party would charge for the same role at the same hours. Keep that documentation in the file alongside the timesheets.

#Funding a Roth IRA with your child’s earned income

This is where the strategy stops being a one-year tax play and starts compounding over decades.

A child with earned income can contribute to a Roth IRA up to the lesser of their earned income or the annual limit. In 2026, that limit is $7,500. A child earning $15,000 from the S-corp can contribute the full $7,500 to a Roth IRA.

Just so you know, the Roth contribution is not deductible. But all growth and qualified withdrawals are tax-free. For a child in the 0% bracket contributing money they would otherwise just accumulate in a savings account, the Roth IRA is nearly a free win.

#The compounding math on a child’s Roth IRA

A single $7,500 contribution at age 14, growing at 7% annually until age 65, compounds to approximately $236,000 tax-free (50 years of compounding at 7%).

If the child earns $7,500 per year and contributes that to a Roth IRA from ages 14 through 18 (five contributions, $37,500 total), the portfolio grows to over $1,000,000 by age 65 at 7% annual return, entirely tax-free. That is the most powerful financial head start most families can give a child, funded by work the child actually did for the business.

Pairing the child’s Roth IRA with your own HSA-as-retirement-account strategy gives your family two separate long-run tax-free vehicles alongside the S-corp’s existing retirement plan options. The combination is worth modeling over a 5-year planning horizon.

#The family management company workaround

Look - if you want both the income-shifting benefit and the §3121(b)(3) FICA exemption, there is a legitimate path for S-corp owners. It requires real structure, but it works when built correctly.

#How the family management company works

The parent forms a separate sole proprietorship or single-member LLC that provides management services to the S-corp. That sole proprietorship is what employs the children. The S-corp pays the sole proprietorship a management fee for the services it delivers. The sole proprietorship deducts the children’s wages against that management fee income.

Because the children are employed by a sole proprietorship owned by a parent, IRC §3121(b)(3) applies. Their wages are FICA-exempt (under 18) and the full income-shifting benefit is preserved.

The net result: the S-corp deducts the management fee as a business expense, the sole proprietorship deducts the children’s wages, and the children owe $0 in federal income tax and $0 in FICA taxes on those wages.

#What makes this structure defensible

The IRS and tax courts have disallowed the family management company arrangement when it lacked substance. Common failure patterns:

• The management company had no real operations and no documented services delivered
• The fee paid by the S-corp was not tied to actual work performed
• The children worked directly for the S-corp, not for the management entity
• The management fee was not at arm’s length

To defend it, the management company needs:

• A real management function with documented scope (marketing oversight, administrative management, HR coordination)
• Invoices to the S-corp based on time and services delivered, updated each period
• Children who report to the management company as their employer, not the S-corp
• A separate bank account and separate books from the S-corp

This is not a one-paragraph setup. It is a real second business entity with real operations and real paper trails. If the management company exists only to generate a FICA exemption with no actual management activity, the IRS will see through it.

#When the workaround is worth it

At $15,000 in child wages per year, the FICA savings from the family management company are $2,295. The cost of setting up and maintaining a second entity (accounting fees, entity costs, separate bookkeeping) is real. For families paying one child $7,500 to $15,000 per year, the FICA savings may not outweigh the added compliance burden.

The math tips toward the workaround when you have:

• Multiple children on payroll simultaneously
• Older teenagers in substantive roles earning $20,000 to $30,000 per year
• Multiple years of planning horizon where the FICA savings compound over time

We help our clients model both paths before recommending the family management company route. It is the right move for some families and over-engineered for others. Like most things in tax planning, the answer depends on the specific numbers.

#Getting the payroll right inside your S-corp

If the direct S-corp approach fits your situation, the execution is straightforward. It just needs to be done correctly from day one.

#Add the child as a W-2 employee

Use your existing payroll provider. Add the child as a new employee with their own Social Security number. Set a regular payroll schedule matching your other employees. Withhold employee FICA (7.65%) from each paycheck and remit both employer and employee shares with your regular payroll tax deposits.

#Handle the W-4 and withholding correctly

The child completes a Form W-4 when they start. If their wages will stay below $15,650 for the year, they can claim “Exempt” from federal income tax withholding on the W-4 (because their expected income tax liability is $0 after the standard deduction). Do not skip this form. FICA withholding still applies even if income tax withholding is exempt.

#Issue a W-2 at year-end

The S-corp issues Form W-2 to the child after year-end, showing wages in Box 1 and FICA taxes in Boxes 4 and 6. The child files a federal income tax return for the year. If wages were below $15,650, they owe $0 in federal income tax. FICA is already withheld and reflected on the W-2.

#Track time and work product throughout the year, not at year-end

Build a simple monthly system. A shared Google Sheet, a notes app, or a paper timesheet all work. What matters is contemporaneous records, not elaborate software. A reconstructed timesheet created in February for the prior year raises exactly the questions you do not want to answer at audit.

For families with multiple children on payroll, give each child a distinct role and maintain separate timesheets. The IRS takes a harder look when multiple children all perform identical tasks at identical wages with no individual-level documentation to differentiate them.

#Common questions

Does my child need to be a certain age to be on my S-corp’s payroll? There is no minimum age in the tax code. But courts require that wages match the work actually performed. A 7-year-old can legitimately earn a small amount for simple age-appropriate tasks. A 7-year-old earning $20,000 in “consulting fees” will not hold up. Age should match the scope and complexity of the work.

Does my child have to be paid at least minimum wage? The Fair Labor Standards Act applies to family member employees in most cases, with a narrow family-business exception. As a practical rule, pay at least federal minimum wage ($7.25 per hour as of this writing, higher in many states) and document hours so you can demonstrate compliance if questioned.

Can we hire the same child through both my S-corp and my spouse’s sole prop? Yes, if the child performs real, distinct work for each entity. Each employer evaluates wages separately for reasonableness. The child’s total earned income across both entities is what determines standard deduction and Roth IRA contribution capacity.

What if my S-corp has a loss year? Can I still deduct my child’s wages? Yes. Wages are an ordinary business deduction regardless of whether the S-corp is profitable. A loss year just increases the K-1 loss flowing to you on Schedule E, subject to your at-risk and passive activity loss rules.

Does hiring a child affect my S-corp’s reasonable compensation analysis? Not directly. Owner reasonable compensation is analyzed based on the services the owner-shareholder provides to the corporation. Child wages are separate employee wages evaluated on their own merits. That said, your total payroll picture benefits from careful modeling. See our full breakdown of reasonable compensation factors if you want the owner side of this in detail.

Is this different from putting a spouse on payroll? Yes. The FICA exemption doesn’t apply to spouses, and the income-shifting math is different because spouses typically file jointly. The spouse on payroll strategy is worth reviewing separately. The two strategies are not mutually exclusive.

What happens when my child turns 18? The §3121(b)(3) exemption (for those using the family management company structure) ends at 18. For straight S-corp employment, nothing changes at 18 mechanically. The child continues on payroll. Their dependent standard deduction no longer uses the “earned income plus $450” formula if they become financially independent, but as long as you can still claim them as a dependent, the formula applies.

Can I pay my child in stock or equity rather than wages? Not for the purposes of this strategy. The standard deduction shelter applies to earned income only. Roth IRA contributions also require compensation (wages or self-employment income). Equity grants or profit distributions do not count as earned income for either calculation.

#Ready to put this inside your S-corp?

The strategy is real, defensible, and it works. What it is not is plug-and-play. The FICA math, the documentation, the payroll setup, and the family management company analysis each require getting the structure right from the first payroll run. We don’t do surprises: you will see the numbers, the annual FICA cost, and whether the management company workaround pencils out for your family before we run a single paycheck.

Book a 15-minute Tax Discovery — Google Meet, no pitch, free advice either way. If you are already working with us as an S-corp owner, our tax planning advisory service is where we build child employment into the broader strategy alongside your retirement accounts, reasonable comp, and year-end planning. We’re really big on being available when you need to run a scenario, not just at tax time.