Yes, absolutely! If your business is a sole proprietorship, wages paid to your child under age 18 are exempt from Social Security and Medicare taxes (FICA), and federal unemployment tax (FUTA). This makes it an incredibly tax-efficient strategy, as outlined in IRS Publication 15, Circular E, Employer's Tax Guide.

Yes, wages paid to your child are deductible for S-Corps and C-Corps, but they are generally subject to FICA and FUTA taxes, regardless of the child's age. The FICA exemption for children under 18 only applies to sole proprietorships or partnerships where parents are the only partners. This is an important distinction to remember.

The work must be ordinary and necessary for your business, and the compensation must be reasonable for the services performed. This means the tasks should be actual business tasks, not chores, and the pay should be comparable to what you'd pay an unrelated employee for similar work. Uncle Kam advises documenting these duties meticulously.

For 2024, a child can earn up to the standard deduction amount ($14,600 for single individuals) without owing federal income tax. This means you can often pay your child a substantial amount tax-free, creating a powerful income-splitting strategy for families. Beyond this, they'd typically file their own tax return.

While not strictly required by the IRS for every case, Uncle Kam strongly recommends maintaining detailed records. This includes job descriptions, timesheets, proof of payment (e.g., bank transfers, pay stubs), and even a formal employment agreement. These documents are crucial for substantiating the legitimacy of the expense during an audit.

The IRS does not specify a minimum age for employment. However, the work must be legitimate and age-appropriate. For very young children, tasks like modeling for marketing materials or light office 'help' might be justifiable, but the IRS scrutinizes these closely. Ensure the work is truly necessary for the business.

Legitimate work can include administrative tasks (filing, data entry), website maintenance, social media management, cleaning the business premises, assisting with inventory, modeling for product photos, or helping with marketing materials. The key is that it's a real business need you'd otherwise pay someone else to do.

Yes, earning income from your business does not automatically disqualify your child from being your dependent, as long as they meet the other IRS dependency tests (age, residency, support). The income earned is taxable to them, not to you as the parent, for dependency purposes.

Yes, the deductibility of the wages for your business is based on the work performed, not on how your child spends their earnings. Once the money is paid to them as legitimate compensation, it's their income to manage. The business deduction is valid as long as the 'ordinary and necessary' and 'reasonable compensation' rules are met.

It's advantageous for any business structure that is a sole proprietorship or partnership (where parents are the only partners) due to the FICA/FUTA exemption. It's less advantageous for service-based businesses where 'labor' is less tangible, but still viable. Any legitimate business need can qualify, regardless of industry, as long as the work is real.

As a sole proprietor, you'd deduct the wages as an expense on Schedule C. For S-Corp/C-Corp, it's a payroll expense. You'll issue your child a Form W-2, and they will then report these wages on their Form 1040. If they earn below the standard deduction, they might not owe tax but still need to file if they had withholdings.

Common mistakes include paying children for chores, paying an unreasonable wage for the work performed, lacking proper documentation (timesheets, proof of payment), not treating the child as a genuine employee, or failing to issue a W-2. The IRS looks for substance over form in these arrangements.

The core principles allowing the deduction of wages for legitimate work remain unaffected by the 2026 tax law expirations. While individual income tax rates or standard deduction amounts might change, the fundamental right to deduct ordinary and necessary business expenses, including employee wages, is a permanent part of the tax code (IRC Section 162).

Generally, no. If your child is performing services under your direction and control, they are considered an employee, not an independent contractor. Misclassifying an employee as an independent contractor can lead to significant penalties from the IRS. It's crucial to follow employer-employee guidelines.

Maintain detailed timesheets or logs of hours worked, a clear job description outlining their duties, records of payments (canceled checks, bank transfers), evidence of their work output (e.g., completed tasks, social media posts), and ideally, a written employment agreement. The more robust your documentation, the better.

Yes, you can deduct legitimate wages paid to multiple children, provided each child performs actual, necessary work for the business and receives reasonable compensation for their services. Each child's employment must stand on its own merit against the IRS's 'ordinary and necessary' and 'reasonable compensation' tests.

While you cannot deduct the Roth IRA contribution itself, your child can contribute their earned wages to a Roth IRA, up to the annual limit ($7,000 for 2024) or their total earned income, whichever is less. This is an excellent way for them to build tax-free retirement savings early, and the wages enabling this contribution are still deductible for your business. Uncle Kam loves this strategy!

Yes, state laws vary. While federal FICA/FUTA exemptions apply to sole proprietorships, some states may still require state unemployment insurance (SUI) or other state payroll taxes for minor children. Always check your specific state's labor and tax regulations regarding child employment and payroll.

Yes, you can still deduct legitimate wages paid to your child over 18. However, the FICA/FUTA exemption for sole proprietorships only applies to children under 18. Once they turn 18, their wages are generally subject to Social Security and Medicare taxes, just like any other employee, regardless of student status.

The wages are deductible for your business regardless of how your child spends them. If your child pays for an educational expense, it might be deductible for them as an education expense if it meets IRS criteria, but it doesn't change the deductibility of their wages for your business. The key is the legitimate work performed.