Somewhere in your house, there's a kid who already works for your business and doesn't know it. They sort receipts on the kitchen table. They hold the phone steady for your product video. They label the shipping boxes because it's the only way they get your attention for twenty minutes. You call it helping. The IRS has a different word for it, and sometimes that word is employee.

This isn't a loophole, a trick, or a gray area. It's an ordinary part of the tax code. But it only works if one condition is true, and most people who try it get that condition wrong.

The idea in one sentence

If you're a sole proprietor, you can pay your child a reasonable wage for real work the business needs. That wage is a deductible expense on your Schedule C, and the child reports it as their own earned income.

That's the whole mechanism. The rest is detail, and the detail is where the value and the risk both live.

Why this can save real money

Three things line up.

Your deduction lowers your self-employment tax base. Wages you pay reduce your net profit, which is what both income tax and the 15.3% self-employment tax are figured on. A dollar of legitimate wages comes off the income you'd otherwise be taxed on at your own marginal rate, plus self-employment tax.

Your child may owe no payroll tax. Under federal rules, wages paid by a parent to a child under 18 are generally exempt from Social Security and Medicare taxes when the business is a sole proprietorship, or a partnership owned only by the child's parents. Wages paid to a child under 21 are also generally exempt from federal unemployment tax (FUTA). So the money leaves your business without a payroll tax layer on either side.

Your child's own tax bill is probably tiny. A child with earned income gets a standard deduction, and for a dependent it can cover earned income up to the full standard deduction amount for the year. That figure was above $15,000 for 2025 and adjusts annually, so check the current number. A teenager earning a few thousand dollars from a parent's business will often owe no federal income tax at all.

So money that would have been taxed at your rate is taxed at roughly zero, as long as the child really earned it.

The condition that decides everything: the work has to be real

The IRS standard for any business deduction is that it be ordinary and necessary. Wages need one more thing: they must be reasonable for the work actually performed.

That gives you three questions to ask honestly:

  • Did the work actually happen? Not "was my kid around," but did they do a task the business needed.
  • Is it work you'd otherwise pay someone to do? Filing, data entry, packing orders, basic social media posting, cleaning the studio, and modeling for your product photos are the kinds of tasks that tend to hold up.
  • Is the pay in line with market rates for that task and that age? If you'd pay a stranger $15 an hour to pack boxes, paying your ten-year-old $60 an hour for the same work is the number an examiner will circle.

Chores don't qualify. Taking out the household trash or cleaning their own bedroom isn't a business expense, no matter how you label it. And the work can't be a disguised allowance. If the payment would happen whether or not any work did, it's a gift, and gifts aren't deductible.

Where parents get it wrong

The failures are predictable, and they all share a root: the arrangement was designed around the deduction rather than around the work.

No record of the hours. A simple log is enough: date, task, time spent. It takes ten seconds. Without it, "my son helped with the business" is just a story.

Cash from the parent's pocket. Pay the child by check or transfer into an account in their name, and keep the record. Money that moves from your business account to the child's account is a paper trail. Cash handed over at dinner is not.

Skipping the forms. An employee gets a W-2, and you generally need to file it with the child's wages even when no Social Security or Medicare tax was withheld. You'll likely need an employer identification number if you don't already have one for payroll, and your state may have its own rules on top of the federal ones. Confirm the details with a tax professional before you start.

Forgetting the legal side. Child labor laws exist, and many have exceptions for children working for a parent's business, but those exceptions vary by state and by the type of work. Hazardous tasks are off-limits. Check your state's rules before assigning anything beyond light office or packing work.

The wrong entity. The payroll-tax exemption is specific to sole proprietorships and parent-only partnerships. If your LLC has elected to be taxed as a corporation, including an S corporation, the exemption doesn't apply the same way, and the child's wages are subject to the usual payroll taxes.

A side benefit most people miss

Earned income is what lets a minor contribute to a Roth IRA, up to the lesser of their earned income or the annual limit. A parent who documents real wages is also quietly making a Roth account possible for a child decades away from needing it. Whether to fund it, and whether the child or the parent supplies the money, is a family decision. But the option only exists if the income is real and recorded.

What this does to your quarterly math

Wages paid to your child reduce your net Schedule C profit, so they reduce the estimated payments you owe. If you're hiring partway through the year, your first three quarterly payments were probably calculated without those wages. Your later payments can come down to reflect them. It's the same idea as any big deduction: it only helps your cash flow if you adjust your payments around it instead of waiting for April.

It's early November, so the calendar matters. Wages count in the year they're paid for work done in that year. You can't backdate a summer's worth of hours in December. If the arrangement is going to start this year, it has to start with real work now, documented from the first day.

Your next moves

  • Decide what the work actually is. Write down two or three specific tasks your child could do that your business genuinely needs, such as packing orders, organizing digital files, or scheduling posts. If you can't name them, stop here.
  • Set the rate from the market, not the tax savings. Look up what a local part-time hire would cost for the same task, then pay your child that rate or less.
  • Start a time log today. A shared note works: date, task, hours. Keep it contemporaneous. Reconstructing it in April doesn't count.
  • Pay through a trail. Move the money from your business account to an account in your child's name, and keep the record alongside the log.
  • Book a short call with a tax pro before the first paycheck. Ask about your state's rules, the W-2 and EIN requirements, and whether your entity type qualifies for the exemption. An hour now is cheaper than an audit later.

Why this belongs in your tax plan, not your imagination

The appeal of this strategy is emotional as much as financial. It rewards the work your family already does, and it teaches a child that effort has a price. But it is only as strong as your records, and your records are only as good as your system. If your quarterly estimates, deductions, and documents live in four different places, a new wage line is one more thing to lose track of.

That's the gap Payday is built for. It connects to Stripe or your bank, calculates your Q1–Q4 estimated payments as your numbers change, and nudges you before each deadline. When wages paid to a child shrink your profit, your next payment shrinks with it, and your records are ready for TurboTax when the year ends. If you'd like to see how it works, you can look at Payday.