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

The Details

What You Get (S-Corp)

• Potential wage deduction: Reasonable wages for genuine services may qualify
• Compensation: Wages are reported to the child under the applicable payroll rules
• Potential Roth IRA eligibility: Qualifying compensation may support a contribution

What You Don't Get (S-Corp)

• Parent-child FICA exemption: The corporation generally does not qualify; 15.3% is the combined employer/employee rate before limits or adjustments

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, and 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?

Illustrative example (not advice): pay a child $5,000 in deductible wages, a parent in the 32% bracket saves about $1,600 in income tax; FICA treatment depends on entity type. Your numbers will differ. Confirm with a CPA.

It depends. Evaluate the genuine business need, reasonable compensation, employer and employee payroll taxes, administrative costs, the child's complete tax return, and any IRA eligibility with your advisers.

A simple wage-times-tax-rate calculation is not a reliable net-benefit estimate for an S-Corp because it omits the child's return, both sides of payroll tax, unemployment and state taxes, payroll fees, and the corporation's full return. Model the complete transaction before relying on a projected benefit.

Important Notes

• Keep records appropriate to the employment and deduction
• Use compliant payroll withholding, deposits, and reporting
• Complete required W-2 and other filings on time
• 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 Employees: Employing Family Members