Yes — a business owner can hire their children. It is legal, it is common, and when done correctly it can reduce the family's overall tax burden. The IRS allows it. The key word is "correctly."

The arrangement fails when the work is not real, the pay is not reasonable, or the paperwork does not exist. Those are the three things the IRS looks for when scrutinizing family employment arrangements.

The tax benefit explained

When a business owner pays their child wages, two things happen:

• The wages are a deductible business expense, reducing the owner's taxable income.
• The income is taxed at the child's rate — which is lower than the parent's rate, and may be zero if the child's total income falls below the standard deduction ($15,000 for 2025).

For a sole proprietor or single-member LLC, there is an additional benefit: wages paid to a child under 18 are exempt from FICA taxes (Social Security and Medicare). That is a 15.3% savings on those wages that would otherwise be subject to self-employment tax.

What the IRS requires

The work must be real

The child must perform actual, legitimate services for the business. Filing, data entry, social media management, cleaning, answering phones, delivering materials — these are all defensible. Paying a child to "help around the office" with no documentation is not.

The pay must be reasonable

The wage must be reasonable for the work performed — what you would pay a non-family employee to do the same job. Paying a 12-year-old $80,000 per year to file papers will not survive scrutiny. Paying $15/hour for 10 hours per week of real work is defensible.

The paperwork must exist

The child must be set up as an employee: W-4 on file, payroll records, timesheets or work logs, and a W-2 issued at year-end. The child must also file a tax return if wages exceed the filing threshold. Paying cash with no records is not employment — it is a gift, and it is not deductible.

Entity type matters

The FICA exemption for wages paid to children under 18 applies to sole proprietorships and single-member LLCs taxed as disregarded entities. It does not apply to:

• Corporations (including S-corporations)
• Partnerships where a non-parent partner is involved

If your business is structured as an S-corp, normal payroll taxes apply to wages paid to your child. The income-shifting benefit still exists, but the FICA exemption does not.

A realistic example

Common mistakes

• No timesheets or work records. If the IRS asks, you need documentation of what work was done and when.
• Paying in cash with no W-2. Cash payments without payroll records are not deductible wages — they are gifts.
• Overpaying for the work. The wage must be reasonable. Inflated wages will be challenged.
• Assuming the FICA exemption applies to an S-corp. It does not. If you have an S-corp, normal payroll taxes apply.
• Forgetting New York payroll requirements. New York has its own withholding and payroll tax rules. A child employee still requires proper New York payroll setup.

Practical next steps

• Define the job clearly — what work will the child do, how many hours, at what rate.
• Set up payroll properly: W-4, state withholding form, and a payroll system that issues a W-2 at year-end.
• Keep timesheets or work logs. A simple spreadsheet is enough.
• Confirm your entity type with your CPA — the FICA exemption only applies to sole proprietors and disregarded LLCs.
• Have the child file a tax return if wages exceed the filing threshold, even if no tax is owed.