{"id":32,"date":"2026-08-31T00:19:21","date_gmt":"2026-08-31T07:19:21","guid":{"rendered":"https:\/\/blog.lunasiaccounting.com\/?p=32"},"modified":"2026-08-31T00:19:21","modified_gmt":"2026-08-31T07:19:21","slug":"32","status":"publish","type":"post","link":"https:\/\/blog.lunasiaccounting.com\/?p=32","title":{"rendered":""},"content":{"rendered":"<\/p>\n<p>A fault line changes how pressure moves underground. Your entity structure does the same thing with payroll taxes.<\/p>\n<p>Paying your kids to work in your business can be legitimate, efficient, and well within IRS rules. It can also go wrong fast \u2014 especially when owners assume every family-business setup gets the same tax treatment. It does not.<\/p>\n<p>As of 2026, the federal rules are clear on the basics. If your child works in your sole proprietorship, a disregarded single-member LLC, or a partnership where both partners are the child\u2019s parents, certain payroll tax exemptions may apply. If your business is taxed as an S corporation or C corporation, those exemptions generally do not apply the same way.<\/p>\n<p>This is a payroll and tax-structure issue first. Not a shortcut. Not a loophole. The IRS expects real work, reasonable wages, and clean records.<\/p>\n<h3>1. The benefit is real \u2014 but only in the right entity<\/h3>\n<p>If you run the right type of business entity, hiring your child can reduce some federal payroll tax costs while shifting some earned income into the child\u2019s return. That is the opportunity. The limitation matters just as much.<\/p>\n<p>For 2026, the key federal employment tax rules work like this when your child is working in your trade or business:<\/p>\n<ul>\n<li><strong>Social Security and Medicare taxes (FICA):<\/strong> wages paid to your child are generally exempt if the child is <strong>under age 18<\/strong> and the business is:\n<ul>\n<li>a <strong>sole proprietorship<\/strong><\/li>\n<li>a <strong>single-member LLC taxed as a disregarded entity<\/strong><\/li>\n<li>a <strong>partnership where both partners are the child\u2019s parents<\/strong><\/li>\n<\/ul>\n<\/li>\n<li><strong>Federal unemployment tax (FUTA):<\/strong> wages paid to your child are generally exempt if the child is <strong>under age 21<\/strong> in those same entity structures<\/li>\n<li><strong>Federal income tax withholding:<\/strong> this still applies under the normal wage withholding rules<\/li>\n<\/ul>\n<p>That last point gets missed constantly. FICA and FUTA exemptions do not mean \u201ctax-free wages.\u201d They mean specific federal payroll taxes may not apply in the right setup.<\/p>\n<p>If you operate through an S corporation or C corporation, stop there and review the structure before you run payroll. The corporation is the employer \u2014 not you personally. That changes the result.<\/p>\n<h3>2. Entity structure controls the outcome \u2014 not family intent<\/h3>\n<p>This is the section most owners need. Family relationship alone is not enough.<\/p>\n<p>Here is the practical comparison:<\/p>\n<table>\n<thead>\n<tr>\n<th>Business structure<\/th>\n<th align=\"right\">FICA exemption for child under 18?<\/th>\n<th align=\"right\">FUTA exemption for child under 21?<\/th>\n<th align=\"right\">Income tax withholding?<\/th>\n<th>Main point<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Sole proprietorship<\/td>\n<td align=\"right\">Yes, generally<\/td>\n<td align=\"right\">Yes, generally<\/td>\n<td align=\"right\">Yes<\/td>\n<td>Most favorable federal family-employment treatment<\/td>\n<\/tr>\n<tr>\n<td>Single-member LLC taxed as disregarded entity<\/td>\n<td align=\"right\">Yes, generally<\/td>\n<td align=\"right\">Yes, generally<\/td>\n<td align=\"right\">Yes<\/td>\n<td>Often follows sole proprietorship treatment<\/td>\n<\/tr>\n<tr>\n<td>Partnership where both partners are the child\u2019s parents<\/td>\n<td align=\"right\">Yes, generally<\/td>\n<td align=\"right\">Yes, generally<\/td>\n<td align=\"right\">Yes<\/td>\n<td>Special family rule can apply<\/td>\n<\/tr>\n<tr>\n<td>Partnership with a parent and a non-parent partner<\/td>\n<td align=\"right\">Generally no<\/td>\n<td align=\"right\">Generally no<\/td>\n<td align=\"right\">Yes<\/td>\n<td>Exemptions do not apply the same way<\/td>\n<\/tr>\n<tr>\n<td>S corporation<\/td>\n<td align=\"right\">Generally no<\/td>\n<td align=\"right\">Generally no<\/td>\n<td align=\"right\">Yes<\/td>\n<td>Corporation is the employer<\/td>\n<\/tr>\n<tr>\n<td>C corporation<\/td>\n<td align=\"right\">Generally no<\/td>\n<td align=\"right\">Generally no<\/td>\n<td align=\"right\">Yes<\/td>\n<td>Corporation is the employer<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>That comparison is the first screening test. Use it before you talk about savings.<\/p>\n<p>A common mistake is assuming a family-owned S corp gets the same treatment as a sole proprietor because \u201cit\u2019s still our family business.\u201d The IRS does not analyze it that way. Corporate wages are corporate wages. In many cases, that means Social Security, Medicare, and FUTA apply to the child\u2019s wages just like they would for another employee.<\/p>\n<p>State rules can vary too. Federal exemptions do not automatically control state unemployment insurance, state withholding, wage-and-hour compliance, or child labor requirements. You need to check the state layer separately.<\/p>\n<h3>3. Reasonable pay and genuine work are not optional<\/h3>\n<p>This is where good planning becomes defensible planning.<\/p>\n<p>Your child must actually work in the business. The wage must be reasonable for the services performed. Those are foundational requirements, and this is a known IRS scrutiny area.<\/p>\n<p>You are on firmer ground when the work is concrete and age-appropriate, such as:<\/p>\n<ul>\n<li>filing and scanning receipts<\/li>\n<li>organizing inventory<\/li>\n<li>cleaning and maintaining work areas<\/li>\n<li>packing shipments<\/li>\n<li>basic data entry<\/li>\n<li>social media support<\/li>\n<li>photo organization<\/li>\n<li>simple admin tasks<\/li>\n<li>website content updates<\/li>\n<li>seasonal office help<\/li>\n<\/ul>\n<p>The pay rate must match the job. If local market pay for similar entry-level work is $15-$20 per hour, paying $40 per hour for routine filing creates a problem. The more aggressive the pay, the more documentation you need \u2014 and the less credible the position becomes.<\/p>\n<p>Habit to build:<\/p>\n<ul>\n<li>Write a job description<\/li>\n<li>Track hours weekly<\/li>\n<li>Keep timesheets<\/li>\n<li>Pay through payroll, not random transfers<\/li>\n<li>Use the child\u2019s own bank account when possible<\/li>\n<li>Keep samples of work performed<\/li>\n<li>Match duties to age and skill level<\/li>\n<\/ul>\n<p>If the child is too young to perform the tasks independently, or the pay is clearly inflated, the tax argument weakens fast. The IRS can challenge deductibility, reclassify amounts, or question whether the arrangement is really compensation at all.<\/p>\n<h3>4. The 2026 income tax rules matter more than many owners expect<\/h3>\n<p>Owners often focus on payroll tax savings and ignore the child\u2019s own filing position. That is incomplete planning.<\/p>\n<p>For <strong>2026<\/strong>, the federal <strong>standard deduction for a single filer is $16,100<\/strong>. For a child who can be claimed as a dependent, the <strong>standard deduction is the greater of $1,350 or earned income plus $450, up to the regular standard deduction amount<\/strong>.<\/p>\n<p>That means earned wages can often be sheltered up to a meaningful level \u2014 but not automatically forever, and not in every fact pattern. The exact filing requirement and tax result depend on total income, withholding, dependency status, and whether the child has unearned income.<\/p>\n<p>Two points matter here:<\/p>\n<ul>\n<li><strong>Earned wages are not subject to the kiddie tax<\/strong><\/li>\n<li><strong>Unearned income can be<\/strong><\/li>\n<\/ul>\n<p>For <strong>2026<\/strong>, the kiddie tax generally applies when a child\u2019s <strong>unearned income exceeds $2,700<\/strong>. At a high level, the first <strong>$1,350<\/strong> of unearned income is not taxed, the next <strong>$1,350<\/strong> is generally taxed at the child\u2019s rate, and the amount over <strong>$2,700<\/strong> may be taxed at the parent\u2019s rate through <strong>Form 8615<\/strong>, if the other requirements are met.<\/p>\n<p>That distinction is critical. Wages for actual work are earned income. Interest, dividends, and similar investment income are unearned income. Do not mix the two.<\/p>\n<p>This is also why owners should not overpromise \u201cincome shifting\u201d results. Yes, there can be tax efficiency. No, it is not a blank check. If your child also has investment income, trust income, or other filing complications, the analysis changes.<\/p>\n<h3>5. Payroll setup, records, and compliance are where the plan succeeds or fails<\/h3>\n<p>A legitimate family hire should look like a real employee file. Because that is what it is.<\/p>\n<p>Action plan:<\/p>\n<ul>\n<li><strong>Confirm your entity type first.<\/strong> This determines whether the FICA and FUTA exemptions may apply.<\/li>\n<li><strong>Set a real job description.<\/strong> Define tasks, schedule, supervisor, and expected output.<\/li>\n<li><strong>Choose a reasonable pay rate.<\/strong> Benchmark it to comparable work in your local market.<\/li>\n<li><strong>Run payroll properly.<\/strong> Issue wages through payroll, not owner draws or casual reimbursements.<\/li>\n<li><strong>Withhold income tax as required.<\/strong> Do not assume withholding disappears because FICA or FUTA may not apply.<\/li>\n<li><strong>Keep time and work records.<\/strong> Store timesheets, task lists, and proof of completed work.<\/li>\n<li><strong>Issue Form W-2.<\/strong> Report wages correctly at year-end.<\/li>\n<li><strong>Review state requirements.<\/strong> State unemployment, child labor, and withholding rules may differ from federal treatment.<\/li>\n<li><strong>Coordinate with your CPA or tax professional.<\/strong> This matters even more if your entity is an S corp or C corp.<\/li>\n<\/ul>\n<p>Can this be automated? In part.<\/p>\n<p>Best firms standardize the process with:<\/p>\n<ul>\n<li>onboarding checklist<\/li>\n<li>payroll coding for exempt vs. non-exempt tax treatment<\/li>\n<li>monthly record retention<\/li>\n<li>year-end W-2 review<\/li>\n<li>entity-specific payroll notes in the file<\/li>\n<\/ul>\n<p>That discipline matters because family payroll tends to get informal. Informal creates risk. Clean payroll creates supportable deductions and fewer surprises.<\/p>\n<h3>6. What Business Owners Should Do Now<\/h3>\n<p>Start with the structure. Before you hire your child \u2014 or before you continue paying them the way you did last year \u2014 confirm whether your business is a sole proprietorship, a disregarded single-member LLC, a both-parents partnership, or a corporation for tax purposes.<\/p>\n<p>Then move fast on documentation:<\/p>\n<ul>\n<li>Review your entity tax classification<\/li>\n<li>List the actual work your child can perform now<\/li>\n<li>Set a market-based hourly rate or salary structure<\/li>\n<li>Put the child on formal payroll<\/li>\n<li>Build a weekly timekeeping habit that takes 5-10 minutes<\/li>\n<li>Separate federal rules from state rules<\/li>\n<li>Flag any S-corp, C-corp, multi-owner, or investment-income complication for a CPA<\/li>\n<\/ul>\n<p>Getting this right supports more than tax compliance. It improves payroll accuracy, deduction support, and year-end reporting.<\/p>\n<h3>Getting Started<\/h3>\n<p>Start small. Pick one real role, set one reasonable pay rate, and run one clean payroll process. Over time, that gives you a family-employment setup that is documented, defensible, and easier to manage.<\/p>\n<p>If you need help organizing payroll records, bookkeeping, or monthly reporting around family employment, contact <strong>LunaSi Accounting, LLC<\/strong>. For entity-specific tax treatment, kiddie tax questions, or planning around S-corp and C-corp structures, work with a qualified <strong>CPA or tax professional<\/strong>.<\/p>\n<hr>\n<p><em>Disclaimer: This content is for general informational purposes and is not legal, tax, or accounting advice. Consult a qualified professional for your specific situation. State rules may vary, and federal family-employment exemptions do not necessarily apply the same way under state law.<\/em><\/p>\n<p>31.08.2026<\/p>\n","protected":false},"excerpt":{"rendered":"<p>A fault line changes how pressure moves underground. Your entity structure does the same thing with payroll taxes. Paying your [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":30,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[1],"tags":[],"class_list":["post-32","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/blog.lunasiaccounting.com\/index.php?rest_route=\/wp\/v2\/posts\/32","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blog.lunasiaccounting.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.lunasiaccounting.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.lunasiaccounting.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.lunasiaccounting.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=32"}],"version-history":[{"count":0,"href":"https:\/\/blog.lunasiaccounting.com\/index.php?rest_route=\/wp\/v2\/posts\/32\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blog.lunasiaccounting.com\/index.php?rest_route=\/wp\/v2\/media\/30"}],"wp:attachment":[{"href":"https:\/\/blog.lunasiaccounting.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=32"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.lunasiaccounting.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=32"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.lunasiaccounting.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=32"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}