How are different family members treated?
| Who works for whom | Income tax withholding | Social Security and Medicare | Federal unemployment |
|---|---|---|---|
| Child under 18, for a parent's sole proprietorship or parents-only partnership | Yes, if wages exceed the exemption | Exempt | Exempt |
| Child 18 to 20, same business | Yes | Taxed | Exempt |
| Child 21 or over | Yes | Taxed | Taxed |
| Spouse, for the other spouse's sole proprietorship | Yes | Taxed | Exempt |
| Parent, for their child's business | Yes | Taxed | Exempt |
| Any family member, for a corporation or S corporation | Yes | Taxed | Taxed |
A single-member LLC owned by a parent and disregarded for tax is treated as a sole proprietorship for these rules. See payroll taxes explained.
What does an example look like?
A parent with a sole proprietorship in the 24% bracket pays a 16-year-old child $12,000 for genuine work during the year. The business deducts $12,000, saving about $2,880 of income tax, plus self-employment tax on that profit. The child owes no Social Security or Medicare tax, and the wages fall within the child's standard deduction, so no income tax is due either. The child can also contribute the earnings to a Roth IRA.
How do you set it up properly?
Define real work
Tasks a business would otherwise pay someone to do.
Pay a reasonable rate
Comparable to what you would pay an unrelated person.
Keep timesheets
Dates, hours and tasks.
Run it through payroll
With a Form W-4, and a Form W-2 at year end even where payroll taxes are exempt.
Pay into the family member's own account
Not used for the parent's expenses.
Check state child labor rules on ages, hours and types of work.
What if the business is a corporation?
The family exemptions do not apply to wages paid by a corporation, including an S corporation, or by a partnership with partners other than the child's parents. Paying a child is still deductible if reasonable, but Social Security, Medicare and unemployment taxes apply in full. Some owners run a separate management sole proprietorship for this reason, which needs its own genuine business purpose.
Check your entity type before relying on the exemption.
Can a child be paid as a contractor instead?
The payroll tax exemption applies to children employed by a parent, not to children paid as independent contractors. A child who is genuinely self-employed, for example running a lawn business for several customers, pays self-employment tax on net earnings of $400 or more. If the child works under your direction in your business, treat them as an employee.
What are the risks?
The IRS disallows wages that are unreasonable, paid for work not actually done, or paid to very young children for tasks they cannot perform. Payments that come back to the parent defeat the purpose. Records and reasonable pay are the defence. See how to run payroll.
Does hiring a spouse save tax?
Usually less, because on a joint return the income stays in the same household and Social Security and Medicare still apply. It can make sense to fund retirement contributions or benefits for the spouse, or to build the spouse's Social Security record. See husband and wife LLC.
Pay a spouse through payroll like any other employee.
Want to put family on payroll?
We check which exemptions apply to your business structure, set up payroll correctly and keep the records that support it.
Questions people ask
Do I pay Social Security tax on wages paid to my child?
Not if the child is under 18 and works for your sole proprietorship or a partnership owned only by the parents.
Does the family exemption apply to an S corporation?
No. Wages paid by a corporation, including an S corporation, are subject to full payroll taxes.
Do I need to issue a W-2 to my child?
Yes, if the child is an employee, even when payroll taxes are exempt.
How much can I pay my child?
A reasonable amount for real work, comparable to what you would pay an unrelated person.
Sources
Every fee, date and rule on this page was taken from these official and primary sources.
- IRS: Family help
- IRS Publication 15 (Circular E): Employer's Tax Guide, family employees
- IRS: Hiring family members tax tip
Rules and fees change. If you are reading this long after October 1, 2026, confirm the figures with the source before you rely on them.
Related guides
More in Payroll and contractors
This guide is general information. It is not tax or legal advice for your situation.