“Can I Put My Kids on Payroll?”

I’ve answered this question from more practice owners than I care to remember. The answer, as always, is “it depends.” More specifically in this case, “probably not.”

A few years ago, a TikTok video went viral and started a wave of bad tax information larger than I’ve ever seen. The influencer in the video (and hundreds of copycats in the years that followed) tells the audience that putting your kids on payroll is a “hack” to save income tax.

At best, this information is misleading. At worst, it’s criminal.

Yes, putting a child on payroll could save some income taxes. However, there are fees and payroll taxes associated with putting them on payroll that reduce or even fully nullify any income tax savings. Save income tax, pay additional payroll tax and additional fees.

And the most obvious point to discredit the social media tax advice: if your child doesn’t actually work for you, you can’t tell the government that they do. That’s not only tax fraud—it’s also employment fraud.

First, we’ll examine if your child qualifies to be an employee.

Then we’ll break down the financial considerations (both good and bad).

Lastly, we’ll provide recommendations regarding how to actually put your kids on payroll (assuming they actually work for you).

Does Your Child Qualify as an Employee?

The IRS and Department of Labor closely scrutinize family employment arrangements. To qualify as an employee, your child must perform legitimate tasks directly related to your business operations. And the amount of pay they receive must be in line with the market rate for those types of tasks.

Tasks That Qualify:

• Filing or organizing business documents
• Basic social media management under supervision
• Data entry or other basic clerical work

Assigning tasks realistically aligned with the child’s capabilities and what you’d pay an unrelated employee for similar work is crucial. Misrepresenting tasks, or paying significantly more than the market rate, can lead to serious legal repercussions.

What about using your kid’s pictures on your website and paying them a modeling fee?

This is a really clever idea, but one that won’t pass IRS scrutiny. Here’s why:

We all know that having images on your website is important to improve the aesthetics. What do we all do in these situations? We get free stock photos from one of the countless services out there. Or maybe we go up a level and pay a stock image provider for premium images. But in the small business space, no one actually pays real-life models to be on their website.

And if, for some crazy reason, you actually did want to pay a child to model for your website (assuming you don’t have your own children), how much would you pay that child? $20? $50? $100?

So it follows that you could legitimately pay your own child $20 or $50 or $100 to be on your website and you’d still be in compliance. Paying way above the market rate will land you in hot water with the government.

But after paying all the associated fees and payroll taxes associated with putting an employee on payroll (detailed in the section below), this minuscule deduction is very clearly not worth it.

Financial and Practical Considerations: Understanding the True Costs of Putting Your Child on Payroll

The primary allure of putting your child on payroll is the potential tax savings. But like so many other aspects of business finance, the reality is far more nuanced. To further complicate matters, the tax rules differ depending on your business’s legal structure (e.g. S-Corp, LLC)

Federal Payroll Taxes for Single-Member LLCs and Sole Proprietors

If your business is a sole proprietorship or an LLC (including PLLC), wages paid to your child under 18 may be exempt from Social Security and Medicare taxes. Additionally, wages paid to children under 21 can be exempt from Federal Unemployment Tax (FUTA).

Federal Payroll Taxes for S-Corps and C-Corps

There are no payroll tax exemptions for practice owners who are S-Corps or C-Corps. Because the vast majority of practices should be S-Corporations, they will have to pay these payroll taxes on their kids’ payroll. This significantly reduces potential savings.

State Payroll Taxes

You might avoid some federal taxes but still incur state payroll taxes depending on which state and city you’re located in.

Payroll Processing Fees and Workers’ Comp Insurance

In addition to payroll taxes, you will also have to pay a payroll service to administer the paychecks and W-2s at the end of the year. Additionally, most states require all employees to be covered by a workers’ comp insurance policy.

Compliance Costs

Because paying family members comes with increased scrutiny by the government, accurate record-keeping and maintaining detailed documentation of the work performed are a must. This probably doesn’t carry a financial cost, but certainly adds significant administrative workload.

Tax Preparation Fee for Your Child’s Tax Return

Because your child got paid, they need to get a W-2. And because they get a W-2, they probably have to file a tax return. This will lead you to incur additional preparation fees, time, and/or tax software costs.

Cost-Benefit Example:

Let’s say you’re paying your child $15/hour for five hours a week. That equals approximately $3,750 per year. And let’s assume your household income (including your spouse’s income if you file a joint tax return) is $200,000. In this situation, putting your kid on payroll might save roughly $1,000 in income taxes.

However, factoring all the costs above, the net savings could drop to only a few hundred dollars—if that.

Once fully aware of the hidden costs, administrative burdens, ethical concerns, and minimal net savings, most practice owners conclude that putting their child on payroll is both impractical and unattractive.

How to Legitimately Put Your Child on Payroll

Ok, so you read all of the above. If you still conclude that hiring your child is legit and makes financial sense, here’s how to do it correctly:

Proper Documentation:

• I-9 and W-4 Forms – Your child must complete these standard employment forms that all employees must fill out.
• Job Description – Clearly define the duties your child will perform.
• Time Tracking – Maintain accurate records of hours worked, tasks performed, and supervisor approvals.
• Payroll Setup – Pay wages through regular payroll, issue regular pay stubs, and file annual W-2 forms.
• Fair Market Compensation – Pay wages comparable to what you’d pay an unrelated employee for similar tasks. Excessive wages trigger IRS scrutiny.

Avoid Common Mistakes:

• Do not issue a 1099 form – Your child is an employee, not an independent contractor.
• Do not pay in cash – Always use traceable methods like direct deposit or checks.
• Stay Compliant with Labor Laws – Adhere to state and Federal requirements, including obtaining work permits or complying with restrictions on hours or types of work minors can perform.

Conclusion

While it is technically possible and potentially beneficial in select scenarios, employing your child is neither simple nor highly lucrative once hidden costs and administrative burdens are factored in.

For most practice owners, ignoring this “tax hack” when it comes across your social media feed is the best course of action.