What the IRS Says

If your child performs legitimate work for your business, you can pay them a reasonable wage and deduct it as a business expense. Your child pays zero federal income tax on the first $14,600 (2024 standard deduction). If your business is a sole proprietorship or partnership, children under 18 are also exempt from FICA taxes.

How to Structure This Properly

Getting the deduction right is not just about whether it is allowed — it is about how you set it up.

1

Establish Business Use

The child must perform legitimate, documented work appropriate for their age and skill level -- social media management, photography, filing, cleaning, data entry, or delivery.

2

Track Usage and Documentation

Create a job description. Keep timesheets documenting hours worked and tasks completed. Issue a W-2 at year-end.

3

Choose the Right Structure

Pay a reasonable market wage for the tasks performed. Have the business write a check to the child (or direct deposit). File a W-2. Open a custodial Roth IRA for the child with the earned income.

4

Avoid Common Mistakes

Do not pay more than a reasonable market rate for the work. Do not pay for work that was not actually performed. Do not use this strategy with a corporation (FICA taxes apply).

5

Optimize for Maximum Benefit

Pair with a custodial Roth IRA -- the child contributes their earned income to a Roth IRA, getting decades of tax-free growth.

When structured correctly, this deduction can significantly reduce your taxable income.

Real Examples

Here is how this deduction typically works in real situations:

Self-Employed / Freelancer

A sole proprietor pays their 16-year-old $12,000 per year to manage social media, photograph products, and handle filing.

Result: Business deducts $12,000. Child pays zero federal income tax (under standard deduction). No FICA taxes for a sole proprietor with a child under 18.

Audit Risk: Low -- legitimate work, reasonable wage, documented timesheets.

Business Owner (LLC / S-Corp)

An LLC (taxed as partnership) pays two children $10,000 each for legitimate business tasks.

Result: Business deducts $20,000. Both children pay zero federal income tax. No FICA for children under 18 in a partnership.

Audit Risk: Low -- partnership structure avoids FICA.

Mixed Use -- High Risk

A business owner pays their 8-year-old $50,000 for consulting services with no timesheets or job description.

Result: IRS disallows the deduction. The wage is not reasonable for the age and tasks. No documentation of work performed.

Audit Risk: Very high -- unreasonable wage and no documentation.

Key Takeaway: The difference between a valid deduction and a denied one usually comes down to documentation, usage percentage, and proper structuring. The same expense can be fully deductible, partially deductible, or not deductible at all — depending on how it is handled.