Do You Need Payroll Software to Hire Your Kids?

Quick Answer

No, most families don't need payroll software to hire their kids. Sole proprietors and spousal partnerships paying children under 18 are exempt from FICA taxes, which eliminates the main reason for traditional payroll. What you do need is proper documentation: employment agreements, work logs, and payment records. Full payroll software (Gusto, ADP, QuickBooks) is overkill and expensive for most family employment situations.

Why There's Confusion

When people hear "hire your kids," they assume they need everything a normal employer needs: payroll software, tax withholdings, quarterly filings, direct deposit setup. This isn't true for most family situations.

The confusion stems from mixing up two different requirements:

Payroll processing = calculating taxes, withholding, depositing, filing
Documentation = proving the work happened and was paid for

The IRS cares about documentation. They don't care which software processed your payroll, or if you used payroll software at all.

The FICA Exemption Changes Everything

Under IRC §3121(b)(3)(A), wages paid to a child under 18 by a parent's sole proprietorship are exempt from Social Security and Medicare taxes. That's 15.3% you don't have to calculate, withhold, or remit.

FICA Exemption Applies To:

✓ Sole proprietorships
✓ Single-member LLCs (taxed as sole prop)
✓ Partnerships where both partners are the child's parents

FICA Exemption Does NOT Apply To:

✗ S-Corporations
✗ C-Corporations
✗ Partnerships with non-parent partners
✗ Children 18 and older

If you qualify for the FICA exemption, the main reason for payroll software disappears. You're not calculating taxes, not withholding, not filing quarterly. You're just paying your kid and documenting it.

What You Actually Need

Regardless of whether you use payroll software, the IRS requires:

Requirement	Why It Matters	Payroll Software?
Employment agreement	Proves employment relationship exists	Doesn't provide
Work logs (contemporaneous)	Proves work was performed	Doesn't provide
Payment records	Proves payment was made	Provides
W-2 at year end	Reports wages to IRS	Provides

Notice that payroll software only helps with 2 of 4 requirements. And those 2 (payment records and W-2) can be handled other ways:

Payment records: Bank transfers create automatic records
W-2: Can be filed manually or with simple tax software

Full Payroll vs. Documentation-Only

Feature	Full Payroll (Gusto, ADP)	Documentation Tool (employkids)	DIY (Spreadsheet)
Employment agreements
Work logging with timestamps
Payment tracking
Tax withholding/filing		N/A (exempt)	N/A (exempt)
Direct deposit		You transfer	You transfer
W-2 generation
Roth IRA documentation
Annual cost	$480-840+	$299-499	Free

When You DO Need Payroll Software

Full payroll software makes sense if:

You have an S-Corp or C-Corp: No FICA exemption, so you need proper tax handling
Your child is 18+: FICA exemption no longer applies
You have other employees: You're already paying for payroll anyway
You want full automation: Direct deposit, automatic tax filings, etc.

If any of these apply, consider Gusto or QuickBooks Payroll. They'll handle the FICA calculations and quarterly filings that you can't avoid.

When You DON'T Need Payroll Software

Skip full payroll software if:

You're a sole proprietor or spousal partnership: FICA exempt
Your children are under 18: FICA exempt
You only employ your kids: No other employees to process
You want to minimize cost and complexity: Documentation-only is simpler

The Cost Difference

Option	Cost/Year	Best For
Gusto	$480+ (+ $6/person/mo)	S-Corps or existing payroll users
QuickBooks Payroll	$600+ (Core plan)	QuickBooks users, S-Corps
ADP Run	$600+ (varies)	Larger businesses
employkids	$299-499	Sole props hiring only their kids
DIY Spreadsheet	Free	DIY enthusiasts willing to risk audit gaps

For a sole proprietor with 2 kids under 18, the math is clear:

Gusto: $480 base + $144 (2 people × $6 × 12 months) = $624/year
employkids: $299/year (Home) or $499/year (Pro for business owners)

And Gusto doesn't generate employment agreements or track work. You'd still need to handle those separately.

What About the W-2?

You do need to issue a W-2 at year end. Your options:

Payroll software: Generates W-2 automatically
employkids: Provides W-2 worksheet data for easy filing
IRS Forms: File W-2 directly at SSA.gov (free but manual)
Tax software: TurboTax, H&R Block, etc. can generate W-2s

The W-2 is straightforward when there's no FICA: Box 1 shows wages, and boxes 3-6 (Social Security and Medicare) are blank or marked exempt.

FAQ

Do I need an EIN to hire my kids?

Not necessarily. Sole proprietors can use their SSN for a household employee. However, getting an EIN is free and keeps your SSN off documents you share with others.

What if I hire my kids AND have other employees?

If you already use payroll software for other employees, you can add your kids to the same system. Just make sure to flag them correctly for the FICA exemption (if applicable).

Can I switch from payroll software to documentation-only?

Yes. If you realize you've been paying for payroll features you don't need, you can switch. Just maintain continuous documentation.

Our Recommendation

For most families (sole prop, kids under 18, no other employees):

Skip full payroll software. Use a documentation-focused tool like employkids that's purpose-built for family employment. You get everything you need for the IRS at a lower cost.

For S-Corps, C-Corps, or those with other employees:

Consider Gusto or QuickBooks Payroll. You need FICA handling anyway, and integration with existing payroll may be simpler. Just remember you'll still need separate documentation for work logs and employment agreements.