Do you have to pay Social Security and Medicare Tax on your child’s wages?

For sole proprietorships, single-member LLCs taxed as a disregarded entity, or partnerships owned by spouses:

Payments to children under 18 years old are NOT subject to social security or Medicare taxes. This means that you don’t have to withhold those taxes from their wages and your business saves on the employer-portion of these payroll taxes. However, if your child is above 18 years old, these payroll taxes are required.

In order to qualify, your child must be employed as a W2 employee, since companies pay no payroll taxes on 1099 contractors.

For corporations (S-corp or C-corp) or partnerships that include a non-parent partner:

For these business structures, there are no tax exemptions for employing your child. You’ll need to withhold and pay the employer-portion of Social Security and Medicare taxes like any other W2 employee.

Do you have to pay Federal Unemployment Tax (FUTA) on your child’s wages?

For sole proprietorships, single-member LLCs taxed as a disregarded entity, or partnerships owned by spouses:

Payments to children under the age of 21 are not subject to the federal unemployment tax (FUTA). Another savings win for your business.

Again, this tax exemption only applies to children hired as W2 employees.

For corporations (S-corp or C-corp) or partnerships that include a non-parent partner:

Just like with Social Security and Medicare taxes, you’ll still have to pay FUTA on your child’s wages if you are incorporated or established as a partnership with a non-parent partner.

Will you need to withhold federal tax on their wages?

Yes. Your child’s W2 wages are subject to federal income tax.

Does your child need to file a federal tax return on their W2 wages?

This depends on how much wages they received as a W2 employee in the tax year. If your child’s wages are below the standard deduction and that is the only income they have, then filing a federal tax return is not required.  Your child might elect to file an income tax return to get a refund of any federal income tax withholding taken out of their payroll check.

If your child has unearned income (such as capital gains from investments) above the $1,250 threshold, a federal tax return is required, regardless of their W2 wage amounts.

Does your child owe state income taxes on their W2 wages?

Yes, applicable state tax rules still apply: this includes both state income and state unemployment taxes. This is regardless of how your business is structured.

Can you put your child’s wages into a traditional IRA or 529 savings account?

Yes, wages can be deposited into a traditional IRA or 529 savings account set up for your child. Depending on income level, contributions to a traditional IRA are fully tax deductible. So you could maximize tax savings by contributing up to $7,000 (in 2024) of your child’s wages to an IRA.

On the other hand, if your child’s income did not exceed the standard deduction — and therefore is not subject to federal tax — you could consider depositing wages into a ROTH IRA.  ROTH IRA contributions are made after tax; therefore, funds you withdraw at retirement are not subject to federal income tax. For 2024, the ROTH IRA contribution limit is also $7,000 for participants under 50.

Contributions to 529 savings plans, on the other hand, are not tax deductible at the federal level. However, depending on where you call home, you may see tax benefits at the state level.

Are there any other tax dos and don’ts for hiring your child?

Your child will need to be a W2 employee on payroll. For any of these tax benefits to kick in, your child must be a W2 employee for your business, not a 1099 contractor. If you’re new to hiring W2 employees, you’ll need to file for an EIN with the IRS, file with the appropriate state(s), and set up a payroll system that will remit necessary taxes to the federal and state authorities.

Your child needs a real job with the business. Sorry, household chores don’t count. Your child needs a legitimate job with your business, like contributing to onsite work if you own a landscaping business or handling office administration duties. Documentation is critical; be sure to keep a record of your child’s work responsibilities, should you ever be audited.

You’ll need to pay your child market wages. You can’t try to take advantage of tax savings by paying your child $100 / hour for a job that would typically pay $25 / hour.

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