Can I pay my kids under my LLC? Yes, but IRS rules must be followed. Learn how to legally hire your child, reduce taxable income, and ensure compliance in 2025.
Introduction
Many business owners ask, “Can I pay my kids under my LLC?” The answer is yes, but it must be done correctly to follow IRS guidelines. Hiring children through an LLC allows business owners to lower taxable income, shift earnings into a lower tax bracket, and create early wealth-building opportunities. However, to maximize tax benefits, you must structure payments properly, document tasks accurately, and follow tax compliance rules.
If the IRS determines that wages paid to a child are excessive or not linked to actual work, the business owner could face penalties or lose deductions. To prevent this, you should understand how to legally pay your kids under an LLC, how payroll taxes apply, and what records you need to maintain. This guide covers everything required to stay compliant while maximizing tax savings in 2025.
IRS Rules for Paying Your Kids Under an LLC
The IRS allows business owners to hire their children, but tax treatment varies based on the LLC’s tax classification. Some LLCs qualify for tax-free wages, while others require payroll tax withholding. Understanding these differences will help you choose the right approach.
Paying Kids in a Sole Proprietorship or Parent-Owned Partnership
• Wages paid to children under 18 do not require Social Security or Medicare (FICA) tax withholding under IRS Publication 15.
• Wages paid to children under 21 are exempt from Federal Unemployment Tax (FUTA).
• A child can earn up to $14,600 tax-free in 2025, avoiding federal income tax.
Paying Kids in an S Corporation or C Corporation
• Payroll taxes (FICA and FUTA) must be withheld, just like for any other employee.
• The business can still deduct wages, but payroll tax obligations reduce overall tax savings.
• Business owners must also submit Form 941 (Quarterly Tax Return) to report payroll taxes.
Age Restrictions and Job Requirements
• The child must perform actual work that benefits the business.
• Tasks must be appropriate for the child’s age and skill level.
• If the IRS finds that a young child is performing complex work, they may flag the arrangement for review.
How Much Can You Pay Your Child Tax-Free?
The IRS allows children to earn up to $14,600 tax-free in 2025 because this amount matches the IRS standard deduction. As long as their taxable income remains below this threshold, they will owe no federal income tax on their earnings.
Example of Tax Savings
• A business owner pays their 13-year-old child $14,600 for office work and marketing assistance.
• Because this income is within the standard deduction, the child owes no federal income tax.
• If the LLC is structured as a sole proprietorship, no payroll taxes apply either.
• The business deducts $14,600 in wages, reducing taxable income and saving approximately $5,500 in taxes (assuming a 37% tax rate).
What Kind of Work Can Kids Do in an LLC?
The IRS requires that children perform legitimate tasks that directly benefit the business. If wages are not linked to real work, the IRS may disallow deductions.
Acceptable Job Duties for Kids in an LLC
• Filing paperwork and organizing office supplies
• Managing business social media pages
• Editing photos and videos for marketing
• Assisting with customer service emails
• Cleaning office spaces or maintaining inventory
To ensure compliance, business owners should maintain detailed timesheets, job descriptions, and payroll records. These documents help prove that wages were earned for legitimate work.
Steps to Legally Pay Your Child Under an LLC
1. Set Up Payroll Correctly
Even when payroll taxes do not apply, proper payroll documentation is essential. Follow these steps:
• Register for state unemployment tax accounts if required.
• Use payroll software to process payments and generate pay stubs.
• Withhold income tax if wages exceed $14,600.
2. Issue a W-2, Not a 1099
Children working in a business must be classified as W-2 employees, not independent contractors.
• A W-2 reports total wages, tax withholdings, and payroll deductions.
• Businesses must file Form 941 to report payroll taxes if applicable.
• The child will only need to file a tax return if earnings exceed the standard deduction.
3. Open a Roth IRA for Long-Term Tax Savings
A child earning wages from an LLC can contribute to a Roth IRA, which allows tax-free growth. If a child earns $6,500 in 2025, they can contribute that full amount, helping them build wealth early with tax-free investment growth.
IRS Audit Red Flags to Avoid
The IRS closely monitors payments to family members, especially children. If wages seem excessive or lack supporting documentation, the IRS may investigate. To stay compliant:
• Pay reasonable wages based on industry standards.
• Keep detailed payroll records and job descriptions.
• Ensure the child has documented responsibilities within the business.
For additional guidance on wage reporting, refer to IRS Publication 15.
Final Thoughts
Many business owners ask, “Can I pay my kids under my LLC?” The answer is yes, but it is essential to follow IRS rules. Hiring children in a business can help lower taxable income, shift earnings into a lower tax bracket, and provide long-term financial advantages.
By structuring payroll correctly, keeping records, and ensuring compliance, business owners can legally maximize tax benefits. Working with a qualified tax professional can provide additional guidance and peace of mind.
