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One of the advantages of managing your own business is the opportunity to employ your children. This provides them with valuable work experience and contributes to reducing tax liability. If you are leveraging this opportunity, it is important to note that the employment tax regulations for family members can differ significantly from those applicable to other employees. Below is an overview of the employment tax rules and considerations when employing your child.<\/p>\n
Tax rules for payments relating to your child\u2019s employment depend on the child\u2019s age and your business entity type. Businesses can deduct reasonable wages paid to a child, taxed at the child\u2019s federal income tax (FIT) rate which is typically lower than the parents\u2019 rate.<\/p>\n
In 2025, the standard deduction for a child is the greater of $1,350 or $450 plus earned income (up to $15,000). Therefore, if a child earns $15,000 in 2025, the standard deduction offsets the entire amount, resulting in no taxable income. Once the child\u2019s unearned income exceeds this threshold, Kiddie tax rules apply and they are taxed at the same rate as their parent(s).<\/p>\n
If your business is a sole proprietorship or a marital partnership where you and your spouse are the child\u2019s parents, then:<\/p>\n
Note:<\/em>\u00a0If the business is a corporation, a non-marital partnership, or an estate (even if it\u2019s the parent\u2019s estate), then payments for your child\u2019s services are subject to income tax withholding, Social Security taxes, Medicare taxes, and FUTA taxes regardless of age.<\/p>\n If you employ your child, the child may establish either a ROTH IRA or a traditional IRA and contribute up to $7,000 of contributions made in 2025. \u00a0Roth IRA withdrawals can be used toward educational expenses such as tuition, fees, books, and supplies without incurring an early withdrawal penalty. However, when you consider the standard deduction rate and lower tax brackets, the tax benefit of a deductible IRA contribution is minimal. As a result, a contribution to a Roth IRA is often the best option. In many cases, the parent can use funds to make the ROTH contribution without any gift tax consequences by using a portion of the gift tax annual exclusion.<\/p>\n This is a great way to give your child an early start on tax free retirement savings.<\/p>\n It is important to ensure that record-keeping best practices (e.g., keeping time reports, filing payroll returns, and basing pay on work performed, not on a relationship to the employer) are followed. Proper documentation will enable you to prove the deduction(s), if the IRS elects to examine your wages paid to your child(ren).<\/p>\n If you have questions on tax considerations specific to your child\u2019s family business employment, consult your Keiter Opportunity Advisor<\/a>.<\/p>\nIRA contributions made by children<\/h3>\n
Payroll record keeping when employing your child<\/h3>\n