The strategy
most owners
botch
Almost every small-business owner has heard some version of "you can put your kids on payroll." Very few have heard the part that matters, which is that the strategy has hard structural preconditions, and if you miss them you don't get a smaller benefit — you get a disallowed deduction and a payroll-tax bill you weren't expecting.
The single most common failure I see in the wild: the FICA exemption for a child under 18 only survives when the parent's business is a sole proprietorship, or a partnership where both partners are the child's parents. Wrap it in an S-corp or a C-corp and the exemption is gone. Plenty of people are running this strategy right now inside an S-corp because someone on the internet told them to.
The other half of the problem is documentation. The tax law here is genuinely favorable. What gets people is that they can't prove the work happened — no job description, no timesheet, no evidence the wage was reasonable for the actual task. The strategy is not the hard part. The file is the hard part.
What's in the guide
- Which entity structures actually preserve the FICA and FUTA exemptions — and which quietly void them
- What "reasonable compensation" means when the employee is twelve
- The documentation standard that holds up: real work, real hours, real wage, contemporaneous records
- How the child's standard deduction interacts with the wage
- What to do with the money afterward — including custodial Roth IRAs
- The three most common ways this gets done wrong, with the fix for each
Where this comes from
The family-business strategy isn't original to me. Mark Kohler has been teaching this piece for years, and that lineage is honest to name. What's mine is the documentation system that survives an examination and the integration into a full tax-strategy stack — the thing I call Taxsmithing.
This guide is education, not advice about your situation. Whether it works for you depends on your entity, your state, your kids' actual ages and actual work, and facts I don't know. Read it, then talk to someone — me or anyone competent — before you run payroll.
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