--- title: "S Corp: Pay Your Kids Tax-Free (2026) | Kids Payroll" description: "The Family Management Company strategy lets S Corp owners avoid FICA taxes when hiring their children. Step-by-step setup guide." lang: en json-ld: | [ { "@context": "https://schema.org", "@type": "BlogPosting", "headline": "S Corp: Pay Your Kids Tax-Free (2026)", "description": "The Family Management Company strategy lets S Corp owners avoid FICA taxes when hiring their children. Step-by-step setup guide.", "url": "https://kidspayroll.com/blog/s-corp-pay-kids-tax-free/", "image": "https://kidspayroll.com/images/jennifer-dylan-theater.jpg", "author": { "@type": "Person", "name": "Jennifer", "url": "https://kidspayroll.com/about/" }, "publisher": { "@type": "Organization", "name": "Kids Payroll", "url": "https://kidspayroll.com", "logo": { "@type": "ImageObject", "url": "https://kidspayroll.com/favicon.png" } }, "datePublished": "2026-01-15", "dateModified": "2026-01-15", "mainEntityOfPage": { "@type": "WebPage", "@id": "https://kidspayroll.com/blog/s-corp-pay-kids-tax-free/" }, "isPartOf": { "@type": "Blog", "@id": "https://kidspayroll.com/blog/", "name": "Kids Payroll Blog" } }, { "@context": "https://schema.org", "@type": "FAQPage", "mainEntity": [ { "@type": "Question", "name": "Can an S Corp owner avoid FICA taxes when paying their children?", "acceptedAnswer": { "@type": "Answer", "text": "Not directly. S Corps must withhold FICA on all employee wages. However, S Corp owners can set up a Family Management Company (a sole proprietorship) that employs the children. The FMC, as a parent-owned entity, qualifies for the FICA exemption." } }, { "@type": "Question", "name": "What is a Family Management Company?", "acceptedAnswer": { "@type": "Answer", "text": "A Family Management Company (FMC) is a sole proprietorship or single-member LLC owned by a parent that contracts with your S Corp to provide management services. The FMC then employs your children, qualifying for the family employment FICA exemption." } }, { "@type": "Question", "name": "Is the Family Management Company strategy legal?", "acceptedAnswer": { "@type": "Answer", "text": "Yes. It's a well-established tax planning strategy used by thousands of business owners. Tax professionals have recommended it for decades. The key is that the FMC must operate as a real business with documented services, separate banking, and proper invoicing." } } ] }, { "@context": "https://schema.org", "@type": "BreadcrumbList", "itemListElement": [ { "@type": "ListItem", "position": 1, "name": "Home", "item": "https://kidspayroll.com" }, { "@type": "ListItem", "position": 2, "name": "Blog", "item": "https://kidspayroll.com/blog/" }, { "@type": "ListItem", "position": 3, "name": "S Corp Owner? Here's How to Still Pay Your Kids Tax-Free (2026)", "item": "https://kidspayroll.com/blog/s-corp-pay-kids-tax-free/" } ] }, { "@context": "https://schema.org", "@type": "BreadcrumbList", "itemListElement": [ { "@type": "ListItem", "position": 1, "name": "Home", "item": "https://kidspayroll.com" }, { "@type": "ListItem", "position": 2, "name": "Blog", "item": "https://kidspayroll.com/blog" }, { "@type": "ListItem", "position": 3, "name": "S Corp Owner? Here's How to Still Pay Yo..." } ] } ] --- [Kids Payroll ](/) FeaturesHow It WorksBenefits[State Laws](/state-labor-laws/)[Free Guide](/guide/)[Tax Calculator](/tax-calculator/)[About](/about/)[Blog](/blog/)[FAQ](/faq/)[Download App](https://apps.apple.com/us/app/kids-payroll-pay-your-kids/id6755955657) 1. [Home ](/) 2. [Blog](/blog/) 3. S Corp Owner? Here's How to Still Pay Yo... Tax Strategy # S Corp Owner? Here's How to Still Pay Your Kids Tax-Free (2026) January 2026 12 min read _Last updated: January 2026_ ## Table of Contents - [Why S Corps Get Different Treatment](#why-s-corps-different) - [The Family Management Company Strategy](#family-management-strategy) - [How It Works in Practice](#how-it-works) - [Setting Up Your Family Management Company](#setting-up) - [What Services Does the FMC Provide?](#what-services) - [Important Considerations](#important-considerations) - [Is It Worth the Complexity?](#is-it-worth-it) - [Common Questions](#common-questions) 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 → The Family Management Company strategy lets S Corp owners avoid payroll taxes when hiring their children. If you operate as a [sole proprietor or single-member LLC](/blog/pay-kids-through-llc), paying your kids is straightforward: hire them, pay them, skip the FICA taxes (if they're under 18), and take the deduction. But if you have an S Corporation, you've probably heard that this benefit doesn't apply to you. Your S Corp is considered a separate legal entity, so wages paid to your children are subject to Social Security and Medicare taxes, just like any other employee. That's true. But there's a workaround: the Family Management Company. * * * ## Why S Corps Get Different Treatment The FICA exemption for children under 18 only applies when: > "The child is employed by a parent in a trade or business" When your business is a sole proprietorship or a partnership where the only partners are the child's parents, _you_ are the employer. The exemption applies. But an S Corporation is its own legal entity. The S Corp is the employer, not you personally. So the parent-child exemption doesn't apply, and you owe: - 6.2% Social Security tax (employer portion) - 6.2% Social Security tax (employee portion) - 1.45% Medicare tax (employer portion) - 1.45% Medicare tax (employee portion) **Total: 15.3% in FICA taxes** On $15,000 in wages, that's $2,295 in payroll taxes you wouldn't owe as a sole prop. * * * ## The Family Management Company Strategy Here's how S Corp owners can recapture the FICA exemption: **Step 1:** Create a separate entity, a Family Management Company (FMC), structured as a sole proprietorship or spousal partnership. **Step 2:** Have your S Corp pay the FMC a management fee for services. **Step 3:** The FMC hires your children and pays their wages. Because the FMC is a sole proprietorship (or spousal partnership), the parent-child FICA exemption applies. Your children's wages are now exempt from Social Security and Medicare taxes. * * * ## How It Works in Practice ### Your current structure: You → S Corporation → Pays child directly (FICA taxes apply) ### With a Family Management Company: You → S Corporation → Pays management fee → Family Management Co (Sole Prop) ↓ Pays child (No FICA if under 18) ### Example: Your S Corp pays your FMC a $20,000 management fee for the year. The FMC uses $15,000 of that to pay your 14-year-old for [legitimate work](/blog/legitimate-tasks-to-pay-kids) (video editing, social media, admin tasks). - S Corp deducts the $20,000 management fee ✓ - FMC pays your child $15,000 with no FICA ✓ - Child pays $0 federal income tax ([under standard deduction](/blog/pay-child-tax-free-2026)) ✓ - FMC has ~$5,000 in net income (taxed to you, but offset by SE tax deduction) * * * ## Setting Up Your Family Management Company ### Structure Options **Sole Proprietorship (simplest):** - No separate entity required, just you operating under a trade name - File Schedule C on your personal return - Child must be employed by a parent (you) **Spousal Partnership (also works):** - Both parents are partners - File Form 1065 - Still qualifies for the FICA exemption **What NOT to use:** - Another S Corp (defeats the purpose) - An LLC taxed as an S Corp (same problem) - Any entity where the parent isn't directly the employer ### Steps to Set Up 1. **Choose a name** - Something like "\[Family Name\] Management" or "\[Family Name\] Consulting" 2. **Open a separate bank account** - Keep FMC finances separate from personal and S Corp accounts 3. **Create a management agreement** - A simple contract between your S Corp and your FMC outlining services provided and compensation 4. **Get an EIN** - Apply at IRS.gov if you'll have employees (your kids) 5. **Set up payroll** - Track hours, pay wages, keep records. See our [complete W-4, I-9, and filing checklist](/blog/kids-payroll-checklist) * * * ## What Services Does the FMC Provide? The management fee needs to be for real services. Document what your FMC actually does for your S Corp: - Administrative support - Marketing and social media management - Bookkeeping assistance - Customer service - Content creation - Research and analysis - Office management - Scheduling and coordination Your children perform these services through the FMC, and the FMC invoices your S Corp. Need task ideas? See our list of [50+ legitimate tasks by age](/blog/legitimate-tasks-to-pay-kids). * * * ## Important Considerations ### The Management Fee Must Be Reasonable Just like your [child's wages must be reasonable](/blog/reasonable-wage-guide), the total management fee must make sense. If your S Corp pays a $50,000 management fee and the only "service" is your 10-year-old filing papers, that's a problem. The fee should reflect the actual value of services provided. Keep invoices, time records, and [documentation of work performed](/blog/hire-kids-irs-documentation). ### You'll Have Some SE Tax on FMC Profits The portion of the management fee that doesn't go to your child's wages is taxable income to you (through the FMC). You'll owe self-employment tax on the FMC's net profit. However, you can minimize this by: - Keeping the management fee close to actual wages paid - Adding a small markup (10-20%) for legitimacy - Contributing to a retirement account through the FMC ### State Requirements Vary Some states have additional requirements for management companies or may not recognize the FICA exemption the same way. Check with a tax professional in your state. ### Keep the Entities Separate Maintain clear boundaries: - Separate bank accounts - Separate records - Actual invoices from FMC to S Corp - Real payments (not just journal entries) * * * ## Is It Worth the Complexity? Let's do the math for a 14-year-old earning $15,000: ### Direct S Corp employment: - FICA taxes owed: $2,295 - Net to family: $15,000 - $2,295 = $12,705 ### Through Family Management Company: - FICA taxes owed: $0 - FMC setup/maintenance: minimal (maybe $200-500 for a DBA and separate account) - Net to family: ~$14,500-$14,800 **Annual savings: ~$1,800-$2,000** If you're paying multiple children or paying near the maximum, savings add up fast: - 2 kids × $15,000 each = $4,590 in FICA savings - Over 10 years = $45,900+ kept in your family Use our [Tax Savings Calculator](/tax-calculator) to estimate your potential savings. * * * ## Common Questions ### Do I need an LLC for the FMC? No. A sole proprietorship works fine. An LLC can provide liability protection but adds complexity. The key is that it's NOT taxed as a corporation. ### Can my spouse run the FMC? Yes, and this often makes sense. Spouse operates the FMC as a sole prop, employs the children, invoices your S Corp. ### What if I'm audited? Have documentation ready: management agreement, invoices, time records for your children, proof of payment. The IRS knows about this strategy. It's legal when done correctly. ### Can the FMC do other things? Yes. It can provide services to multiple businesses (if you have them) or take on other clients. Just maintain proper records. * * * ## The Bottom Line The Family Management Company isn't a loophole. It's a legitimate structure that restores the tax treatment Congress intended for family businesses. If you're an S Corp owner paying your kids, you're leaving thousands on the table by paying unnecessary FICA taxes. Once your child has earned income, consider opening a [Roth IRA](/blog/roth-ira-for-kids-rules) to help them start building tax-free wealth for the future. Kids Payroll works whether you're a sole prop, S Corp, or using a Family Management Company. Track hours, document wages, and stay compliant, regardless of your structure. See how we compare to [traditional payroll software](/blog/kids-payroll-vs-gusto-quickbooks). _Disclaimer: This article provides general information about tax strategies. Consult a qualified tax professional before implementing a Family Management Company to ensure it's appropriate for your specific situation._ ## Related Articles [Tax Strategy ### How to Set Up a Family Management Company to Pay Your Kids (2026) S Corp owners can still pay their kids tax-free using a Family Management Company. Here's the step-by-step setup guide from a real estate investor who's done it. Read article](/blog/family-management-company-setup/) [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 ### 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/) 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 → [Calculate Your Savings](/tax-calculator/) ### Kids Payroll Transform "paying kids through your business" from a confusing tax loophole into a streamlined, automated, family-wealth engine. 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