Tax planning
Hiring Your Children or Spouse in Your Business: The Tax Benefits and the Rules
Business owners can hire their children and shift income to a lower tax bracket — and children under 18 working in a parent's sole proprietorship avoid FICA and FUTA entirely. Here's how to do it correctly so the deduction holds up to scrutiny.
Written by Matt Reese, CPA · 6 min read · Published April 2026·Share on LinkedIn
Key Takeaways
- Wages paid to your minor child for legitimate work in your business are deductible as a business expense and taxed at the child's lower rate — often 10% vs. your 32–37%.
- In a sole proprietorship or husband-wife partnership, wages paid to a child under 18 are exempt from FICA (Social Security and Medicare) and FUTA. This exemption does not apply to S-corps or C-corps.
- For the deduction to hold up, the work must be real, the wage must be reasonable for the work performed, and you must actually pay the child — deposits into a savings account in their name count.
- Earned income qualifies the child for Roth IRA contributions — even at age 14. Depositing wages into a Roth IRA for a minor starts decades of tax-free compounding.
The income-shifting strategy
When a business owner in the 32% or 37% tax bracket pays their child to do legitimate work, that income moves from the high-bracket parent to the low-bracket child. The business deducts the wage at the parent’s rate; the child pays tax at their lower rate.
For 2025, a child with no other income pays:
- $0 tax on the first $14,600 (standard deduction for single filer)
- 10% on income from $14,601 to $11,925 above the standard deduction
- 12% on the next bracket
A $20,000 wage to the child generates a $20,000 deduction for the parent (saving $6,400–$7,400 in taxes at 32–37%). The child pays $0 federal tax on the first $14,600 and 10% on the remainder — approximately $540.
The real magic: the child earns income, qualifies for a Roth IRA contribution, and starts compounding tax-free at age 14. That Roth IRA started at 14 has 50+ years of tax-free growth before retirement.
The FICA exemption for sole proprietors
This is the most valuable benefit available to sole proprietors and partnerships owned by the parents:
- Wages paid to a child under 18 by a sole proprietor parent are exempt from Social Security and Medicare taxes (FICA)
- Wages paid to a child under 21 by a sole proprietor or parent-owned partnership are exempt from FUTA (federal unemployment)
This exemption saves an additional 7.65% employer FICA on the wages — in addition to the income tax savings.
In this example, the family saves over $8,000 in federal taxes annually — and the child accumulates Roth IRA contributions that can compound tax-free for decades. Over 10 years, the cumulative tax savings and Roth IRA balance can be substantial.
Requirements for the deduction to hold up
The IRS will scrutinize family employment arrangements. These requirements make the deduction defensible:
| Requirement | What it means in practice |
|---|---|
| Real work performed | The child must actually do real tasks for the business — answering phones, social media, filing, data entry, cleaning, light labor, photography for the business |
| Reasonable compensation | Pay must reflect what you'd pay a non-family employee for the same work. Keep it commensurate with age and role. |
| Actually paid | Write real checks or make real bank transfers. No paper-only transactions. The IRS expects actual payment. |
| W-4 completed | Child fills out W-4. File W-2 at year-end for wages paid. Maintain payroll records. |
| Work documented | Keep a work log: what tasks were done, when, and for how many hours. Contemporaneous records beat reconstructed ones. |
| Under 18 (for FICA exemption) | The FICA exemption only applies in a sole proprietorship / parent-owned partnership and only through age 17 |
'Owner's allowance' dressed up as wages doesn't survive audit
Hiring your spouse
Wages paid to a spouse are subject to the same FICA and FUTA as any employee — no exemption applies. But there are legitimate reasons to put a spouse on payroll:
- Retirement plan access: A spouse on payroll can participate in the employer’s retirement plan. If you have a Solo 401(k), adding the spouse as an employee allows a second set of contributions (employee deferral up to $23,500 + employer contribution up to 25% of their wages).
- Health insurance: The spouse’s wages allow you to offer employer-paid health insurance, which is deductible by the business and potentially excludable from the spouse’s income.
- Legitimizing business activity: If the spouse genuinely participates in the business, putting them on payroll creates a clear employment record and separates their business role from informal involvement.
A sole proprietor married to a working spouse should consider whether the spouse qualifies as a co-owner (in which case the business is a partnership, not a sole proprietorship), which has different FICA implications.
The Roth IRA angle is the most underused benefit
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Frequently asked
Questions owners actually ask
- What age can children start working in the business?
- There's no IRS minimum age for a child to be employed in a family business — but the IRS expects the work to be appropriate for the child's age and abilities. A 7-year-old shredding documents or sorting mail is plausible. A 9-year-old paid $50/hour for 'consulting' is not. State child labor laws may impose their own restrictions on hours and types of work for minors.
- Does the FICA exemption apply if I operate as an S-corp?
- No — the FICA exemption for employing minor children only applies to sole proprietors and partnerships owned entirely by the child's parents. S-corps and C-corps are separate legal entities, and wages paid to a child by a corporation are subject to the same FICA rules as any other employee. The income-shifting benefit still exists for S-corps (lower bracket taxation), but the payroll tax savings do not.
- What's a reasonable wage for a minor child?
- Reasonable means what you'd pay a non-family member to do the same work. A 14-year-old doing social media posting might earn $12–$15/hour. A 16-year-old doing data entry or customer service could earn $15–$20/hour. Whatever you pay, document the work performed, hours worked, and pay stubs. The IRS evaluates reasonableness — paying your 11-year-old $60,000/year is an audit target.
- Do I need to withhold income taxes from my child's wages?
- Yes — even if no FICA applies. You still withhold federal income tax based on the W-4 the child fills out. If the child's total income is below the standard deduction ($14,600 for 2025), they can claim exempt on the W-4, meaning no withholding. But if they have investment income (unearned income), the 'kiddie tax' rules may apply and increase the effective rate.
- Can I hire my spouse?
- Yes, but the tax benefits are different. Wages paid to a spouse are fully subject to FICA and FUTA — there's no exemption. The benefit of hiring a spouse is access to fringe benefits they may not otherwise have (health insurance, retirement plan contributions), and potentially legitimizing their involvement in the business for home office or vehicle deductions. A spouse as a true W-2 employee allows them to contribute to an employer-sponsored 401(k) based on their own wages.
Take the next step
Turn tax questions into a plan. Talk with Matt or see how we work with operating business owners.
Educational content only.This article is for informational purposes and does not constitute tax, legal, or investment advice. Every owner’s facts are different; consult a qualified CPA and advisor before acting. Tax and accounting services are provided through Matt Reese, CPA; investment advisory services are provided through Measured Risk Portfolios, a registered investment adviser. Matt Reese, CPA and Measured Risk Portfolios are separate entities; clients are not required to engage both.