--- title: "Family Management Company Setup: Pay Kids Tax-Free via S-Corp (2026) | Kids Payroll" description: "S-Corp owners can't use the FICA exemption directly. The workaround: a Family Management Company. Step-by-step setup guide from someone who's done it." lang: en json-ld: | [ { "@context": "https://schema.org", "@type": "BlogPosting", "headline": "Family Management Company Setup: Pay Kids Tax-Free via S-Corp (2026)", "description": "S-Corp owners can't use the FICA exemption directly. The workaround: a Family Management Company. 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[Home ](/) 2. [Blog](/blog/) 3. How to Set Up a Family Management Compan... Tax Strategy # How to Set Up a Family Management Company to Pay Your Kids (2026) February 2026 11 min read _Last updated: February 2026_ ## Table of Contents - [Why S Corp Owners Need an FMC](#why-s-corp) - [Step-by-Step Setup](#setup) - [What My Family Does](#what-we-do) - [Common FMC Mistakes to Avoid](#mistakes) - [Frequently Asked Questions](#faq) If your business is structured as an S Corporation, you've probably heard that you can't avoid payroll taxes when hiring your children. That's technically true if you pay them directly from the S Corp. But there's a well-established workaround that thousands of business owners use every year: a Family Management Company. GUIDE #### Want the full 7-step playbook as a PDF? Get the same guide my readers use to set this up correctly the first time. Sent to your inbox in 60 seconds. Get the Guide → A Family Management Company (FMC) is a separate entity, typically a sole proprietorship or single-member LLC, that sits between your S Corp and your children. Instead of your S Corp paying your kids directly, the S Corp pays a management fee to the FMC. The FMC then pays your children for the work they perform. Because the FMC is owned by a parent and taxed as a sole proprietorship, the IRS exemption for minor children kicks in, and you avoid Social Security, Medicare, and FUTA taxes on their wages. This isn't a loophole or a gray area. It's a legitimate business structure that tax professionals have recommended for years. For context on why entity type matters so much, read: [Sole Prop vs S Corp: Which Is Better for Paying Your Kids?](/blog/sole-prop-vs-s-corp-paying-kids) * * * ## Why S Corp Owners Need an FMC When a child works directly for an S Corporation, the corp must withhold and pay FICA taxes (Social Security and Medicare) on the child's wages regardless of their age. That's an extra 15.3% cost that sole proprietors and single-member LLC owners don't have to worry about. The reason comes down to how the IRS views the employment relationship. The payroll tax exemption under IRC Section 3121(b)(3)(A) only applies when a child is employed by a parent. An S Corporation is its own legal entity, so even if you own 100% of the shares, the corporation is technically the employer, not you. The FMC solves this by creating a parent-owned entity that directly employs the child. * * * ## Step-by-Step Setup ### Step 1: Choose Your Entity Structure The simplest approach is a sole proprietorship. You don't even need to form an LLC, though many business owners prefer the added liability protection. If you do form an LLC, make sure it's a single-member LLC owned by one parent and that it does not elect to be taxed as a corporation. It needs to remain a disregarded entity for tax purposes. One important note: do not use the words "Family Management Company" in your official business name or registration documents. It's an informal term used in the tax planning community, not a recognized legal designation. Choose a real business name that reflects the services the company provides. ### Step 2: Get an EIN Apply for a free Employer Identification Number from the IRS at irs.gov. This takes about five minutes online and you'll receive your EIN immediately. ### Step 3: Open a Separate Bank Account Open a business checking account for the FMC. This is critical for documentation purposes. All payments from your S Corp to the FMC, and all wage payments from the FMC to your children, should flow through this account. ### Step 4: Create a Service Agreement Draft a written agreement between your S Corp and your FMC. This contract should outline the management services the FMC will provide, such as administrative support, marketing assistance, office organization, or content creation. The agreement should include a reasonable fee structure. A common approach is to set the management fee slightly above the total wages you'll pay your children (around 10% above wages paid) so the FMC shows a small profit. ### Step 5: Set Up Employment for Your Children Create written job descriptions for each child, outlining their duties, pay rate, and expected hours. Even though the FMC is exempt from FICA for children under 18, you still need proper employment documentation. See our guide on [setting reasonable wages](/blog/reasonable-wage-guide) and our [payroll documentation checklist](/blog/kids-payroll-checklist) for what records to keep. ### Step 6: Run Payroll and Invoice Monthly Each month, the FMC invoices your S Corp for management services rendered. The S Corp pays the invoice. The FMC then pays your children for their work. Keep all invoices, payment records, and time logs organized. See our full guide on [why proper payroll matters](/blog/run-payroll-for-child) and how to run it correctly. * * * ## What My Family Does I've been paying my daughter Dylan since she was about six years old. She started with simple tasks like shredding documents and organizing files in my real estate business. Now at eleven, she handles more involved administrative work. Over the years, we've built a system where her work is documented, her pay is [reasonable for her age](/blog/reasonable-wage-guide), and everything flows through the proper channels. The key is making it real. Dylan does actual work during set hours, and we track everything. It's not a paper exercise. She's learning responsibility and financial literacy while our family benefits from the tax advantages the IRS specifically allows. * * * ## Common FMC Mistakes to Avoid The biggest mistake is treating the FMC as a shell with no real substance. Your FMC needs to operate like a real business: separate bank account, real invoices, documented services, and reasonable fees. If it looks like a pass-through arrangement with no business purpose other than avoiding taxes, the IRS can disallow it. Other common mistakes: - Paying children for personal tasks (household chores don't count) - Failing to keep time records - Paying wages that aren't reasonable for the child's age and work performed - Forgetting to file the FMC's taxes on Schedule C Read our guide on [what happens if the IRS audits your kids' payroll](/blog/irs-audit-kids-payroll) to understand what documentation they look for and how to protect yourself. * * * ## Frequently Asked Questions ### Does my spouse need to draw a salary from the FMC? Not necessarily. The FMC can operate with just your children as employees. However, if your spouse performs management or supervisory work for the FMC, paying them a reasonable wage can strengthen the legitimacy of the arrangement. ### Can both parents own the FMC? If both parents own it, the FMC would be taxed as a partnership (or a qualified joint venture if you're married). The FICA exemption still applies as long as all partners are parents of the child. However, single-parent ownership as a sole proprietorship is the simplest and most common structure. ### How much should the FMC charge my S Corp? The management fee should be reasonable for the services provided. A common approach is to set it at the total of children's wages plus a small markup (around 10%) to cover the FMC's administrative overhead. Avoid inflating the fee, as excessive management fees can raise red flags. ### Do I need to file a separate tax return for the FMC? If the FMC is a sole proprietorship or disregarded LLC, you report its income and expenses on Schedule C of your personal Form 1040. No separate business tax return is required. _Disclaimer: This article is for educational purposes only and does not constitute tax or legal advice. Consult a qualified CPA or tax professional for guidance specific to your situation._ ## Related Articles [Tax Strategy ### Sole Prop vs S Corp: Which Is Better for Paying Your Kids? (2026) Sole proprietors get automatic payroll tax exemptions when hiring their kids. S Corp owners need an extra step. Here's how both structures work in 2026. Read article](/blog/sole-prop-vs-s-corp-paying-kids/) [Family Business ### Can Grandparents Hire Grandchildren for Tax-Free Wages Too? Grandparents can hire grandchildren and deduct the wages, but the FICA exemption under IRC §3121(b)(3)(A) only covers parent-owned businesses. Here is what still works, and how a Family Management Company can bridge the gap. Read article](/blog/can-grandparents-hire-grandchildren-for-tax-free-wages-too/) [Tax Strategy ### FICA Exemption for Minor Children: How Business Owners Save on Payroll Taxes Business owners can skip FICA taxes when paying children under 18. Here's exactly how the exemption works, who qualifies, and how much you can save in 2026. Read article ](/blog/fica-exemption-minor-children/) GUIDE #### Want the full 7-step playbook as a PDF? 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