That headline number is where most articles on hiring your kids in your business stop. The more useful question is structural. The same paycheck to the same 15-year-old can be almost entirely tax-free in one type of business and fully taxed in another, and the difference comes down to the legal form the parent chose years ago, usually for reasons that had nothing to do with payroll.
Why does the entity type matter so much?
Because payroll taxes and income taxes follow different rules. Income tax is the easy half. A child who is claimed as a dependent gets a standard deduction that grows with earned income, up to the regular amount, so a teenager with wages and nothing else can earn up to $16,100 in 2026 without owing any income tax on it. That part works the same whatever business pays the wages.
Social Security, Medicare and unemployment tax (FUTA) are the half that changes. The IRS rules on family employees are blunt about it. Wages paid to a child under 18 by a sole proprietorship owned by the child’s parent, or by a partnership in which each partner is a parent of the child, are not subject to Social Security and Medicare taxes. Wages to a child under 21 from those same businesses are not subject to FUTA. Income tax withholding still applies regardless of age.
Consider a Mesa landscaping company owned by a married couple as a two-member partnership, with their 16-year-old working weekends and summers for $12,000. In a review of a business like that, an advisory firm such as K&R Strategic Partners would start with the ownership chart, because that chart decides most of the outcome before anyone looks at a timesheet. Both partners are the child’s parents, so the $12,000 is subject to neither FICA nor FUTA. The business deducts the full $12,000 as wages. The child owes nothing on it.
Now change one fact. A third partner, a longtime crew lead, buys a 10% stake. Not every partner is now a parent of the child, so the exemption disappears, and the same $12,000 is now subject to 7.65% in Social Security and Medicare taxes on both the employer and employee sides, plus FUTA on the first $7,000.
How do the common structures compare?
Here is how the rules land on the structures small-business owners actually use.
Sole proprietorship, including a single-member LLC taxed as one. This is the best case. A single-member LLC that is disregarded for tax purposes is treated as a sole proprietorship for these employment tax rules, so the child under 18 is exempt from Social Security and Medicare and the child under 21 is exempt from FUTA. The owner deducts the wages against business income, which also lowers the owner’s self-employment tax base.
Partnership owned only by the child’s parents. Same treatment as the sole proprietorship, as long as every partner is a parent of the child. A husband-and-wife partnership qualifies. A partnership with a sibling, a grandparent or an outside investor does not.
S corporation. No exemption. The IRS is explicit that wages from a corporation are subject to income tax withholding, Social Security, Medicare and FUTA regardless of the child’s age, even when the parent controls the corporation. The wages are still deductible, and the child can still earn up to the standard deduction without owing income tax, but both sides pay FICA.
This is the structure where the strategy is most often oversold. An owner who elected S corporation status to save self-employment tax on distributions has, by the same choice, given up the family payroll exemption. For many profitable businesses, that trade is still worth it. It is simply not free.
C corporation. Same as the S corporation on payroll taxes. The deduction offsets corporate income taxed at the flat 21% rate, which makes the income-shifting effect smaller than for a parent in a higher individual bracket.
LLC taxed as a partnership with non-parent members. Treated like any other partnership that fails the each-partner-is-a-parent test. Full payroll taxes apply.
What does the comparison look like in dollars?
Take the same $12,000 of wages to a 16-year-old in two businesses, each owned by a mom or dad in the 24% bracket.
In a sole proprietorship, the parent’s taxable income drops by $12,000, saving about $2,880, plus roughly $1,700 in self-employment tax that would otherwise have applied to that slice of profit. The child pays neither income tax nor FICA on it. Total family savings come to about $4,500, before state tax.
In an S corporation, the wage deduction still saves the owner around $2,880 in the 24% tax bracket, but the business pays $918 in employer FICA, the child has $918 in employee FICA withheld, and FUTA adds up to $42 on the first $7,000 if the business qualifies for the full state credit. The family keeps a bit over $1,000 of the benefit once the deduction for the employer’s share of FICA is counted.
Both versions still beat paying the child an allowance out of after-tax money. The gap between them is the reason to look at structure first.
What has to be true for any of this to hold up?
The work has to be real, and the pay has to be reasonable for that work. That is the line the IRS draws between a deductible wage and a disguised gift, and it is where audits of family payroll usually start. Paying a fourth grader $16,000 for “social media management” invites exactly that conversation. Paying a high school junior the going rate for a cashier or a yard crew member does not.
Documentation is the cheapest protection: a written job description, timesheets, a separate bank account in the child’s name, and a W-2 at year-end. Payroll software such as Gusto or ADP handles the withholding and filings the same way it does for any other employee, and it creates the paper trail without extra effort.
State rules add their own layer. In Arizona, for example, the state minimum wage law’s definition of an employee excludes anyone employed by a parent or a sibling, so a child working for a parent’s business falls outside it. Child labor rules under the Fair Labor Standards Act still apply, with some leeway for businesses wholly owned by parents and no leeway for hazardous work.
Where does the money go next?
The most effective use of a child’s wages is often a Roth IRA. Contributions are limited to the lesser of earned income and the annual cap, $7,500 for 2026, and a teenager who earns $12,000 can put $7,500 into a Roth IRA that grows tax-free for five decades. That only works if the wages are real and reported, which brings the analysis back to the payroll setup.
The strategy is not new, and it is not aggressive when it is done properly. What has shifted is the size of the tax-free band and the number of owners who have elected S corporation status without noticing what that did to the family payroll exemption. If you are thinking about hiring your children before the next school break, your ownership chart deserves a second look.
