Almost every business owner with kids has heard some version of "you can put your children on payroll." It's one of the most repeated strategies on the internet, and it is completely legitimate. The IRS specifically acknowledges that business owners can hire family members and deduct their wages.
What gets repeated far less often is the structural precondition that decides whether it works at all. And if you miss it, you don't get a smaller benefit. You get a disallowed position and a payroll tax bill you weren't expecting.
The FICA exemption survives only in 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.
Why this trips so many people
The advice and the entity get separated. Someone hears the strategy on a podcast, likes it, and applies it inside whatever structure they already have. Nobody says "this only works if…" because the clip was ninety seconds long and the caveat wasn't the interesting part.
So there are a lot of owners running this right now inside an S-corp, believing they have an exemption they do not have. The wages are still deductible — that part is fine. But the payroll taxes they thought they'd avoided are due.
The IRS put "bad tax information on social media" in its Dirty Dozen list in both 2024 and 2025. This strategy is a large part of why.
What the structure actually buys you
Where it does apply, there are two separate exemptions and they have different age limits:
- FICA — wages paid to a child under 18 are exempt from Social Security and Medicare. That's the 15.3% everyone is chasing.
- FUTA — federal unemployment tax is exempt for a child under 21.
On top of that, the wage shifts income from your bracket to your child's. For most kids the total federal liability is zero, because the standard deduction absorbs it. The business deducts the wage; the child pays nothing on it.
If you're an S-corp, you're not out of options
You're just out of that option in that form. The usual answer is a separate entity — a family management company — structured so the wages are paid from somewhere that qualifies, with a real service arrangement between the two.
That is more machinery, and it needs to be built properly and documented. It is not a thing to improvise off a blog post. But it exists, and for the right situation it works.
The part that actually gets people audited
Here's what I want you to take away, because it matters more than the entity question:
The strategy is not the hard part. The file is the hard part.
The tax law here is genuinely favourable. What sinks people is that they cannot prove the work happened. No job description. No record of hours. No evidence the wage was reasonable for what was actually done.
"Reasonable" is doing real work in that sentence. It means what you would pay a stranger for the same task. A twelve-year-old genuinely can do filing, basic data entry, cleaning, social media, or modelling for your marketing photos — and there is a defensible market rate for each of those. There is not a defensible market rate that turns a ten-year-old into a $16,000-a-year employee for unspecified help.
What survives an examination is boring:
- A written job description that a stranger could perform
- Contemporaneous time records — written as the work happens, not reconstructed later
- A wage benchmarked to something real, with the reasoning written down
- Actual payroll, actually run, paid into an account in the child's name
- The money then used like the child's money, because it is
What to do with it afterwards
The part I like most has nothing to do with your return. Earned income makes a child eligible for a custodial Roth IRA. Money contributed at eleven has decades to compound, and it compounds tax-free.
That's the actual prize. The deduction is this year's benefit. The Roth is the one they'll still be thanking you for in forty years.
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 strategy stack rather than a one-off move.
I wrote the whole thing up properly — entity tests, the reasonable-compensation standard, the documentation templates, and the three most common ways it gets done wrong. It's free.
I'm Ryan Otto — an MSCTA and fractional CFO in Allen, Texas. I run Accent Financial Services, The Taxsmiths, Dayspring Hospitality Solutions, and the AI studio Dayspring IdeaForge. This is education, not advice about your situation — your entity, your state and your own facts all change the answer. Ask me directly if you want it applied to yours.