Can I hire my child if I have an S-Corp?

The Details

What You Get (S-Corp)

• Wage deduction: Deduct wages as a business expense
• Income shifting: Move income from your bracket to theirs
• Roth IRA eligibility: Child has earned income to contribute

What You Don't Get (S-Corp)

• FICA exemption: Must pay 15.3% payroll taxes on wages

The FICA exemption under IRC §3121(b)(3)(A) only applies when a child under 18 is employed by their parent. An S-Corp is a separate legal entity—the S-Corp (not you personally) is the employer, so the exemption doesn't apply.

Comparison: S-Corp vs. Sole Prop

Is It Still Worth It?

Yes. Even without the FICA exemption, hiring your child through an S-Corp provides:

1. Tax bracket arbitrage: If you're in a 32% bracket and your child is in 0% (under $16,100), you save 32 cents for every dollar shifted.
2. Roth IRA opportunity: Your child gets earned income to fund tax-free retirement growth.
3. Business deduction: The wages reduce your S-Corp's taxable income.

The Math

Say you pay your child $5,000 through your S-Corp (32% bracket):

• Your tax savings: $1,600 (32% deduction)
• FICA paid: $765 (employer + employee)
• Net benefit: $835 + Roth IRA opportunity

The FICA cost reduces the benefit but doesn't eliminate it. And the Roth IRA compounding dwarfs the FICA cost over time.

Important Notes

• All the same documentation requirements apply
• You must run payroll and withhold FICA
• Issue a W-2 at year end
• Consider whether restructuring makes sense (consult your CPA)

Learn more: How to Hire Your Kids: The Complete Guide

Sources

• IRC §3121(b)(3)(A): FICA Exemption Requirements
• IRS Family Help: Employing Family Members