The FICA exemption for paying your kids does not care whether you call it an hourly wage, a project fee, a sales commission, or a year-end bonus. What it cares about is who owns the business, how old your child is, and whether the pay is actually reasonable for work that actually happened. If you have those three things right, the form of compensation is largely a non-issue.
TL;DR: Yes, bonuses and commissions qualify for the FICA exemption under IRC §3121(b)(3)(A) when paid by a sole proprietor, single-member LLC, or spousal partnership to a child under 18. The IRS does not require hourly pay. It requires real work, reasonable wages, and proper documentation. The entity you use matters more than the pay structure.
Written by the Kids Payroll team, grounded in IRC §3121(b)(3)(A) and current IRS guidance on legitimately employing your children in a family business.
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Does the FICA Exemption Apply to Bonuses and Commissions?
Yes. IRC §3121(b)(3)(A) exempts wages paid by a parent to a child under 18 from FICA taxes, which means no Social Security (6.2%) and no Medicare (1.45%) withheld from the child's check, and no matching employer share from you. The statute uses the word "wages" broadly. It does not say "hourly wages only." IRS Publication 15 confirms this: compensation paid by a parent to a child under 18 working in the parent's trade or business is exempt regardless of the form it takes.
So a $500 end-of-year bonus for running your social media accounts all fall? Exempt. A 10% commission on every product your 15-year-old helps sell at your craft fair booth? Exempt. A flat project fee for filming and editing your latest product video? Also exempt, as long as the underlying business structure qualifies.
For a deeper look at how the exemption works, the FICA exemption for minor children post covers the mechanics in full. The short version: the exemption applies to sole proprietorships, single-member LLCs taxed as sole props, and spousal partnerships or qualified joint ventures. It does not apply to S-Corps, C-Corps, or partnerships with a non-parent partner.
What the IRS Actually Scrutinizes: Reasonableness, Not Pay Format
Here is where people get tripped up. The exemption question and the deductibility question are two separate things, and conflating them causes real problems.
The FICA exemption is almost automatic if the entity structure is right and the child is under 18. But the business deduction for those wages, the thing that actually reduces your taxable income, depends on whether the pay is reasonable. That is the standard the IRS applies, and it is the one courts have enforced.
In Eller v. Commissioner, 77 T.C. 934 (1981), the Tax Court allowed a deduction for wages paid to children as young as 7 for genuine age-appropriate work. The Court also limited the deduction to what was actually reasonable for that work. Translation: the court will not let you pay your nine-year-old $40,000 a year for stuffing envelopes, call it a "performance bonus," and deduct it. The work has to be real, and the pay has to be proportionate.
That principle applies regardless of how you structure the payment. A commission arrangement, in fact, can be easier to defend than a flat salary because the pay rises and falls with actual measurable output. "She earned 10% of every sale she closed at the booth" is a clean, defensible number. "We paid him a $5,000 bonus because we felt like it in December" is not.
The IRS tends to look hardest at year-end lump sums with no paper trail, so if you go the bonus or commission route, you need documentation that is just as tight as what you would have for hourly wages. More on that in a moment.
The Math: How Much Does This Actually Save?
Let's run through a real example so this stops being abstract.
Assumptions:
- You run a sole proprietorship (or single-member LLC).
- Your 14-year-old helps manage your business's Instagram, shoots product photos, and responds to customer DMs. She works roughly 5 hours a week during the school year and 10 hours a week over summer break.
- You pay her a combination: $500/month flat fee during the school year (9 months), plus a $1,200 "content creator bonus" at the end of summer for a campaign that visibly drove sales.
- Total annual compensation: $4,500 + $1,200 = $5,700.
- Your marginal federal income tax rate: 32%.
The savings:
You deduct $5,700 from your business income. At 32%, that is $1,824 in federal income tax saved. Because you are a sole proprietor, that $5,700 is also removed from your self-employment tax base, saving you roughly 14.13% (the employer-equivalent half of SE tax) on that amount, another $806. Total federal tax reduction: roughly $2,630.
Your daughter owes zero federal income tax on $5,700 because her standard deduction as a dependent is at least her earned income plus $450, up to the $16,100 single standard deduction for 2026. She is nowhere near that threshold. And since that $5,700 is earned income, she can contribute up to $5,700 to a Roth IRA this year.
That is $2,630 back in your household, and $5,700 seeded into a tax-free retirement account for a teenager. Not bad for a summer of Instagram posts.
How to Structure a Bonus or Commission So It Holds Up
The IRS is not hostile to performance pay for child employees. What it is hostile to is pay that looks like it was invented after the fact to shift income. Here is what you actually need to do.
1. Set the arrangement in writing before the work starts.
Write a simple employment agreement or commission schedule. One page is fine. "Emma will receive 10% of net craft fair sales she actively participates in, paid within 14 days of each event." Date it. Keep it.
2. Track the work, not just the outcome.
For commissions, log the events she worked, hours on site, and the sales figures. For project bonuses, keep a scope of work document, a completion note, and any output (the video file, the social media analytics report, whatever it was). The IRS wants to see that the pay was for real, documented work, not a family transfer dressed up as payroll.
3. Keep the rate defensible.
What would you pay a stranger to do the same thing? That is the ceiling. A 14-year-old managing social media could reasonably earn $15-$25/hour in most markets. A commission structure for booth sales is common in retail. Stay inside what an arm's-length employer would pay and you will be fine. The reasonable compensation guide for kids on payroll has market-rate examples by age and task type.
4. Issue a W-2, not a 1099.
This is the mistake that quietly wrecks an otherwise solid strategy. If you issue a 1099, the IRS treats the income as self-employment income, and your child owes self-employment tax on it. There goes the exemption. Pay through payroll, run a W-2. The W-2 vs. 1099 breakdown for child employees explains exactly why this matters and how to avoid the 1099 trap.
5. Pay at the time the work is done, not all at once in December.
Or if you pay a year-end bonus, make sure the documentation shows that it was earned throughout the year through specific contributions. A bonus memo tied to a defined project or performance metric is far more defensible than a December check with no supporting records.
One Scenario Where This Gets Complicated: The S-Corp
If your business is taxed as an S-Corp, the FICA exemption does not apply automatically, and no pay structure, hourly, commission, or bonus, will change that. The S-Corp is a separate legal entity. Wages it pays are subject to FICA regardless of who receives them.
The workaround is a Family Management Company. The S-Corp pays a management fee to a separate sole prop or single-member LLC owned by you (the parent). That entity employs your child and issues the W-2. Because the employing entity is a sole prop, the FICA exemption applies. This structure has to be a real operating entity with documented services, not a paper shell. The Family Management Company setup guide walks through how to do it correctly.
Key Takeaways
- The FICA exemption under IRC §3121(b)(3)(A) applies to all forms of compensation, including bonuses and commissions, not just hourly wages.
- The exemption requires: a qualifying entity (sole prop, single-member LLC, or spousal partnership), a child under 18, and wages for genuine, documented work.
- The IRS scrutinizes reasonableness, not pay format. Commission arrangements can actually be easier to defend because the pay is tied to measurable output.
- Always pay through payroll and issue a W-2. A 1099 eliminates the exemption and creates self-employment tax liability for your child.
- Year-end bonuses without supporting documentation are the most common audit trigger in this space. Build the paper trail before December.
Get the Payroll Mechanics Right From the Start
Setting up bonus and commission payroll for a child employee is not complicated, but the details have to be right: the right entity, the right documentation, and the right form (W-2, not 1099). The Kids Payroll app is built specifically for this. It handles payroll runs for minor children in sole props and LLCs, keeps your records organized, and makes W-2 time straightforward. Sign up at kidspayroll.com to get started.
FAQ
Does the FICA exemption apply to bonuses and commissions, or only to hourly wages? The exemption under IRC §3121(b)(3)(A) applies to all wages paid by a parent-owned sole proprietorship or spousal partnership to a child under 18. The IRS does not restrict it to hourly pay. Bonuses and commissions qualify if the underlying work is legitimate and the total compensation is reasonable.
Can I pay my child a large year-end bonus and deduct it? Yes, if the bonus is reasonable compensation for documented work performed during the year. The deduction depends on reasonableness, not on the timing of the payment. A well-documented bonus tied to a specific project or performance goal is far easier to defend than an undocumented lump sum.
What happens if I pay my child via 1099 instead of W-2 for commission work? The FICA exemption disappears. A 1099 signals self-employment income, which means your child owes self-employment tax (15.3% on net earnings). For child employees in a family business, payroll and a W-2 are always the correct form. See Eller v. Commissioner, 77 T.C. 934 (1981) for the court's view on documentation requirements.
Does a commission paid to my child count as earned income for Roth IRA purposes? Yes. W-2 wages, including commissions and bonuses paid through payroll, are earned income. Your child can contribute up to the lesser of their total earned income or the annual Roth IRA contribution limit ($7,500 for 2026) into a custodial Roth IRA.
My business is an S-Corp. Can I pay my child a commission and claim the FICA exemption? Not directly. The S-Corp entity does not qualify for the exemption. The common solution is a Family Management Company, a sole prop that employs the children and bills the S-Corp for services. That structure preserves the exemption because the employing entity is a sole proprietorship, not the S-Corp.
Does paying a commission to my child affect my ability to claim them as a dependent? No. Paying your child legitimate wages does not disqualify them as your dependent. The dependency test is separate from the employment relationship. Parents regularly employ their minor children, claim them as dependents, and deduct the wages as a business expense, all at the same time.
Sources
- IRC §3121(b)(3)(A), FICA exemption for child employed by parent
- IRC §3306(c)(5), FUTA exemption for child under 21
- IRC §73, services of a child taxed to the child
- IRC §63, standard deduction
- IRS Publication 15 (Circular E), Employer's Tax Guide
- IRS Publication 929, Tax Rules for Children and Dependents
- Eller v. Commissioner, 77 T.C. 934 (1981)
This article is for educational purposes only and is not tax or legal advice. Consult a qualified CPA before putting your kids on payroll.