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

#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. This is capped at the single-filer standard deduction of $16,100. That means a child earning $15,650 in wages owes $0 in federal income tax. $15,650 plus $450 equals the $16,100 standard deduction, so 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. This example is before the QBI deduction. QBI can lower the savings by about $960 at the 32% bracket, or more or less depending on wage limits.
• 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. That’s $20,000 minus the $16,100 standard deduction. At 10%, that’s 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 carry over into the corporate structure.

What this means in practice: say your S-corp puts your 15-year-old son on payroll at $15,000 a 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 about a $1,930 after-tax cost advantage over the S-corp structure ($2,295 before the employer-side FICA deduction), 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 outweigh 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. The FUTA exemption covers a child under 21 who works for a parent’s sole proprietorship, or a partnership of parents. It does not apply to an S-corp. 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. 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 an hour for social media work that a freelancer on Upwork would do for $15 an 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. 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 falls apart 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. Say 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. 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. Say a child is in the 0% bracket, contributing money they would otherwise just leave in a savings account. For them, 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% a year until age 65, grows to about $236,000 (51 years of compounding). This is a sample, not a promise of any return.

Say the child earns $7,500 a 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. It’s 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. These sit 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 - some families use a sole proprietorship that hires the children and bills the S-corp for real management work. The IRS has not approved this setup and may challenge it. It holds up only if the work, the pay and the fees are real and written down.

#How the family management company works

The parent runs the business as a true sole proprietorship, not an LLC. A single-member LLC is treated as a separate employer for payroll tax purposes. So it does not get the child exemption. The sole proprietorship hires the children and bills the S-corp for real management work. 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 management fee should equal the children’s wages plus real costs. Any extra fee is taxed to the parent as self-employment income. If the S-corp directs the children’s work, the IRS may treat the S-corp as the employer and charge FICA.

#What makes this structure defensible

The IRS can deny the deduction when the work or the fees are not real. 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 a 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 a 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 a 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. Your child can claim “Exempt” on the W-4 only in one case: they owed no federal income tax last year, and expect to owe none this year. 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. A child with only wages below the standard deduction does not have to file. The child may file to get back any income tax that was withheld. Say wages were below $15,650. Then 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 made 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? Federal and state wage and child labor laws may apply to your child. Check them with your state labor office. Pay at least the minimum wage that applies where you operate.

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 adds to the K-1 loss on Schedule E. The loss is limited first by your basis in the S-corp. Then it’s limited by the at-risk and passive loss rules, and by the excess business loss limit.

Does hiring a child affect my S-corp’s reasonable compensation analysis? Not directly. Owner reasonable compensation gets 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 keeps going 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 need their own careful work. Get 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. We show you this before we run a single paycheck.

Book a 20-minute Tax Discovery: Google Meet, no pitch, free advice either way. Say 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. That includes 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.