Can you make your child’s wages “tax‑free”?

• In an S corporation, wages you pay to your child are subject to FICA (Social Security and Medicare), federal unemployment (FUTA), and income tax withholding, just as they are for any other employee. There is no special payroll tax exemption for corporate family employees based on age. For corporations, payments for services of a child are subject to income tax withholding, Social Security, Medicare, and FUTA taxes regardless of age (see “Family employees” in the employer guide) Publication 15 (Circular E), Employer’s Tax Guide.

• That said, your child’s wages may generate little or no federal income tax for the child if total income is at or below the child’s standard deduction. For 2024, a dependent’s standard deduction is the greater of $1,300 or earned income plus $450 (up to the basic standard deduction for the filing status), meaning the child’s earned wages can be offset by the standard deduction—potentially producing zero income tax owed. Note that this does not eliminate payroll taxes; FICA and FUTA still apply in an S‑Corp context Topic no. 551, Standard deduction.

• “Kiddie tax” applies to unearned income (interest, dividends, capital gains) over $2,600 for certain children; it does not apply to earned wages from bona fide employment 2024 Instructions for Form 8615 and Topic no. 553, Kiddie tax.

Key compliance principles for employing your child in an S‑Corp

• Bona fide employment and actual work
  Your child must perform real, age‑appropriate services your business needs (e.g., digital filing, basic data entry, social media content support, light office tasks). Create a job description, train the child appropriately, and supervise work. Maintain weekly timesheets and task logs as you would for any employee.

• Reasonable compensation
  Pay only what similar businesses would pay for similar tasks in your market. The IRS emphasizes that compensation must be “reasonable” for services rendered—S corporations must treat payments as wages to the extent amounts represent reasonable compensation for services. Factors include duties, responsibilities, time and effort, training, and market rates. Document your rate analysis (for example, local entry‑level hourly rates) Wage Compensation for S Corporation Officers (IRS Fact Sheet).

• Payroll taxes and returns
  In an S‑Corp, wages to your child are subject to:

  • FICA (Social Security and Medicare) withholding and employer match.

  • Income tax withholding (based on the child’s Form W‑4).

  • FUTA (standard FUTA wage base applies).
    File and deposit employment taxes timely: Form 941 (quarterly), Form 940 (annual FUTA), and furnish Forms W‑2/W‑3 to the SSA by the deadline About Form 941 | About Form 940 | General Instructions for Forms W‑2 and W‑3.

• Proper onboarding and documentation
  Complete Form W‑4 for the child; issue Form W‑2 at year‑end; maintain Form I‑9 employment eligibility records; enroll on payroll with appropriate withholding and deposits. Use standard procedures and retain records 2025 Form W‑4 | Form I‑9 (USCIS).

• Corporate context versus sole proprietorships/partnerships
  Be aware of differences you may read online: FICA/FUTA exemptions for under‑18 children working for a parent apply to sole proprietorships or partnerships where each partner is a parent—those exemptions do not apply to S corporations. For corporations, wages to a child are fully subject to FICA and FUTA Publication 15 (Circular E).

Step‑by‑step implementation checklist

• Define a role and tasks: Draft a job description including expected duties, hours, and supervision. Keep timesheets and output evidence (e.g., documents filed, images edited).

• Determine reasonable pay: Benchmark local entry‑level rates for similar tasks. Keep printouts or notes showing market rates Wage Compensation for S Corporation Officers.

• Complete onboarding:

  • Form W‑4 for withholding (children may claim appropriate entries; consider using the IRS Tax Withholding Estimator).

  • Form I‑9 and documentation (kept in your files).

  • Add to the payroll system; withhold and match FICA; withhold income tax if indicated; assess FUTA on the first $7,000 of wages.

  • Issue paychecks (not “allowances”) and avoid cash payments without controls 2025 Form W‑4.

• Report properly:

  • Form 941 quarterly for federal payroll tax (FICA and withholding).

  • Form 940 annually for FUTA.

  • W‑2/W‑3 to SSA by the deadline About Form 941 | About Form 940 | General Instructions for Forms W‑2 and W‑3.

• Maintain audit‑ready records: Job description, timesheets, payroll journals, pay stubs, W‑4, I‑9, market rate support, and evidence of work performed (deliverables).

Income tax results for the child

• If the child’s earned income (wages) does not exceed the dependent standard deduction, the child may owe little or no federal income tax on those wages. For 2024, the dependent standard deduction equals the greater of $1,300 or earned income plus $450, but not above the basic standard deduction; confirm annual amounts when planning. This has no impact on payroll taxes, which still apply in an S‑Corp context Topic no. 551, Standard deduction.

• Kiddie tax does not apply to earned wages; it applies to unearned income (interest, dividends, capital gains) over $2,600 for certain children 2024 Instructions for Form 8615 | Topic no. 553, Kiddie tax.

Deductibility and S‑Corp considerations

• A properly documented wage that is reasonable compensation for services is deductible by the S corporation and reduces pass‑through income to shareholders. S corporations must classify reasonable payments for services as wages subject to employment taxes; be consistent and avoid recharacterizing wages as distributions or reimbursements without support Wage Compensation for S Corporation Officers | S corporations | IRS.

• Do not attempt to contribute corporate distributions to a child’s retirement plan based on shareholder distributions; only W‑2 wages qualify as “compensation” for employee plan contributions (see plan rules and IRS FAQs). Shareholder distributions are not earned income for retirement plan contribution purposes S corporations | IRS.

Reasonable compensation: factors and risk management

The IRS expects officer/shareholder‑employees (including family members) to be paid reasonable wages commensurate with duties performed. Courts and IRS consider training, duties, responsibility, time and effort, dividend history, what comparable businesses pay, and compensation agreements. Underpaying for substantial services, or mislabeling wage payments as distributions, can trigger employment tax recharacterization and penalties Wage Compensation for S Corporation Officers.

Common mistakes to avoid

• Paying “stipends” or “allowances” without payroll and documentation—treat them as wages with full withholding and reporting.

• Setting inflated wages to “zero out” corporate income—must reflect actual services and market rates, or risk disallowance.

• Mischaracterizing wages as distributions or reimbursements—wages are required for services; distributions cannot substitute for reasonable compensation.

• Ignoring employment law limitations or safety considerations—put your child’s wellbeing first and ensure tasks are age‑appropriate.

Summary

For S‑Corp owners, the right way to employ your children is straightforward:

• Hire them for real work your company needs, pay them a reasonable wage, run full payroll, and document everything.

• The corporation deducts the wages and complies with FICA, FUTA, and Forms 941/940/W‑2.

• The child’s earned income may produce little or no federal income tax because of the dependent standard deduction; kiddie tax doesn’t apply to earned wages.

• Avoid aggressive recharacterizations and ensure compensation aligns with market norms to reduce audit risk.

Executed properly, this strategy is compliant, beneficial, and audit‑ready S corporations | IRS | Topic no. 551, Standard deduction | 2024 Instructions for Form 8615 | Wage Compensation for S Corporation Officers | 2025 Form W‑4 | 2024 Instructions for Form 1120‑S.