What is reasonable compensation for a child?
Quick Answer
Reasonable compensation for a child is what you'd pay an unrelated person for the same work. For most age-appropriate tasks, this ranges from $5-8/hour for ages 5-7, $8-12/hour for ages 8-11, and $10-18/hour for ages 12+. The IRS doesn't publish specific rates. What matters is that the pay reflects the work's value, the child's ability, and local market rates. Overpaying is a red flag; underpaying may indicate the work isn't real.
Why Reasonable Compensation Matters
The IRS requires that wages paid to your children be "reasonable" for two reasons:
- Legitimacy: Unreasonable pay suggests the employment isn't real
- Tax avoidance: Overpaying shifts more income to your child's lower tax bracket
If audited, you'll need to justify why you paid what you did. The question auditors ask:"Would you pay a non-family member the same rate for this work?"
Reasonable Rate Ranges by Age
While there's no official IRS rate schedule, here are commonly accepted ranges based on child development and typical market rates:
| Age Range | Typical Rate | Max Hours/Week | Typical Tasks |
|---|---|---|---|
| 5-7 years | $5-8/hr | 3-5 hrs | Picking up toys, dusting, simple filing |
| 8-9 years | $7-10/hr | 4-6 hrs | Vacuuming, organizing, labeling |
| 10-11 years | $8-12/hr | 6-8 hrs | Data entry, yard work, pet care |
| 12-13 years | $10-14/hr | 8-10 hrs | Social media, detailed cleaning, inventory |
| 14-15 years | $12-16/hr | 12-15 hrs | Customer service, complex admin tasks |
| 16-17 years | $14-20/hr | 15-20 hrs | Skilled work, supervision, specialized tasks |
Factors That Affect Reasonable Compensation
1. The Work Itself
More skilled or difficult work justifies higher pay. A 14-year-old doing graphic design can reasonably earn more than one doing basic filing.
2. Local Market Rates
What would you pay someone else in your area? Rates in New York City differ from rural Kansas. Research local babysitter rates, lawn care prices, or entry-level wages for comparable tasks.
3. The Child's Experience and Reliability
A 12-year-old who's been helping in your business for two years and is highly reliable can reasonably earn more than one who's just starting.
4. Minimum Wage Considerations
While federal minimum wage laws generally don't apply to children employed by their parents in non-hazardous work, paying significantly below minimum wage raises questions about whether the work is legitimate.
What's Unreasonable?
Too High
- Paying $50/hour for basic filing work
- Paying a 7-year-old the same as an adult professional
- Wages that conveniently max out the standard deduction exactly
Too Low
- $2/hour for any work (suggests it's not real employment)
- Payment that doesn't match the documented hours
- Token amounts that couldn't reasonably compensate for the work claimed
Documentation to Support Your Rates
If audited, you may need to explain why your rates are reasonable. Keep records of:
- Rate research: Screenshots of similar jobs on Care.com, Indeed, or local job boards
- Consistency: A regular pay rate that doesn't fluctuate wildly
- Job complexity: Written job descriptions showing what work justifies the rate
- Geographic factors: Note if you're in a high cost-of-living area
Common Mistakes to Avoid
- Working backward from the standard deduction: Don't set hours and rates to hit exactly $16,100
- Paying the same regardless of age: A 7-year-old and 15-year-old shouldn't earn the same
- Ignoring the actual work: Pay should match tasks, not be arbitrary
- Dramatic increases: Going from $8/hr to $25/hr suddenly is suspicious
A Practical Approach
Here's a simple framework:
- Research what similar work pays in your area
- Start at the lower end of the range
- Give small increases as the child gains experience (like any employee)
- Document why you set the rate you did
- Be consistent: pay the same rate for the same work
Bottom Line
When in doubt, err conservative. It's better to pay $10/hour and have no questions than pay $30/hour and face IRS scrutiny. The goal is legitimate employment that happens to have tax benefits, not tax avoidance disguised as employment.
Learn more: How to Hire Your Kids: The Complete Guide
Sources
- IRS Publication 929: Tax Rules for Children and Dependents
- IRS Family Employees: Reasonable compensation requirements
- DOL Minimum Wage: State minimum wage reference
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