Last updated: February 2026
One of the first questions business owners ask when they learn about hiring their children is whether their business structure matters. The short answer is yes, it matters a lot. The entity type you operate under determines whether you automatically qualify for payroll tax exemptions or need to set up an additional structure to get the same benefits.
Sole Proprietorship: The Simplest Path
If you operate as a sole proprietor, hiring your children comes with built-in tax advantages. Under IRC Section 3121(b)(3)(A), wages paid to a child under age 18 by a parent's sole proprietorship are exempt from Social Security and Medicare taxes. Children under 21 are also exempt from Federal Unemployment Tax (FUTA).
This means if you pay your 12-year-old $10,000 for legitimate work in your business, you don't owe the employer's share of FICA (7.65%), and your child doesn't owe the employee's share either. That's a combined savings of $1,530 compared to hiring a non-family employee. Your child can also earn up to $16,100 in 2026 (the standard deduction amount) without owing any federal income tax. See how much you can pay your child tax-free in 2026 for a deeper breakdown.
Single-Member LLC: Same Benefits
A single-member LLC that hasn't elected corporate taxation is treated as a disregarded entity by the IRS. For employment tax purposes, it's the same as a sole proprietorship. All the same exemptions apply. This is important because many business owners form an LLC for liability protection but don't realize they still get the sole proprietor tax treatment for hiring their kids. If you're the only member of your LLC and you haven't filed Form 2553 to elect S Corp status, you're in the clear. Read our full guide: How to Pay Your Kids Through Your LLC.
S Corporation: Extra Steps Required
An S Corporation is a separate legal entity. When your child works for your S Corp, the corporation is the employer, not you personally. The IRS's family employment exemption doesn't apply because the parent-child relationship exists between you and your child, not between the S Corp and your child. That means your S Corp must withhold and pay FICA taxes on your child's wages just like any other employee.
But there's a workaround: the Family Management Company. You can set up a sole proprietorship or single-member LLC (owned by one parent) that contracts with the S Corp to provide management or administrative services. The FMC hires your children directly, and because the FMC is a parent-owned sole proprietorship, the payroll tax exemption applies. See the full step-by-step guide: How to Set Up a Family Management Company. Or for S Corp-specific context: S Corp Owner? Here's How to Still Pay Your Kids Tax-Free.
Partnership: It Depends
If your business is a partnership where both partners are parents of the child, the FICA exemption still applies. If any partner is not a parent, the exemption is lost and payroll taxes apply to your child's wages. A married couple operating an LLC that's taxed as a qualified joint venture also qualifies for the exemption. C Corporations have the same limitation as S Corps and need the same Family Management Company workaround.
Side-by-Side Comparison
Paying a child under 18 a salary of $12,000 per year:
| Structure | FICA on child wages | FUTA | Income tax on child | Business deduction |
|---|---|---|---|---|
| Sole Prop / Single-Member LLC | $0 | $0 | $0 | $12,000 |
| S Corp (direct pay) | $1,836 | Up to $420 | $0 | $12,000 |
| S Corp + FMC | $0 | $0 | $0 | $12,000+ |
Use our Tax Savings Calculator to see the numbers for your specific situation.
Which Is Better?
For simplicity, sole proprietorships and single-member LLCs win. The tax benefits are automatic, no extra structures are needed, and the documentation is straightforward.
For S Corp owners, the strategy still works well. It just requires the additional step of setting up a Family Management Company. If you're already saving significantly on self-employment taxes through your S Corp election, the small hassle of an FMC is worth it to also capture the family employment benefits.
Regardless of your structure, the documentation requirements are the same across the board. Read: What Records to Keep for the IRS and Why You Need to Run Proper Payroll.
Frequently Asked Questions
Can I switch from S Corp to sole proprietorship just to get the tax break?
You could revoke your S Corp election, but that's a major business decision with implications far beyond hiring your kids. Talk to your CPA before making entity changes for any single reason.
What if my LLC is taxed as a partnership with my spouse?
You likely still qualify for the exemption. If both partners are parents of the child, the FICA exemption applies. A qualified joint venture election can also work.
Does the Family Management Company need its own insurance?
It depends on your state and the nature of the work. At minimum, the FMC should have its own bank account and proper documentation.
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.