Big Rules That Apply No Matter What Your Entity Is

Before we talk about sole prop vs S-corp vs LLC, the IRS requires a few things to be true in every scenario:

A. Your Child Must Be a Real Employee

• The work must be real, age-appropriate, and needed in the business.
• The pay must be reasonable for the job.
• You must actually pay them through payroll.

B. You Must Follow Payroll and Labor Laws

• Kids are W-2 employees, not contractors.
• California minimum wage in 2025 is $16.50/hour statewide (many cities are higher).
• Child labor limitations still apply.
• Workers' compensation may still be required.

C. 2025 Standard Deduction for Children

• $15,750 -- Single
• $23,625 -- Head of Household
• $31,500 -- Married Filing Jointly

The dependent child's standard deduction is the greater of:

• $1,350, or
• Earned income + $450, up to $15,750.

D. Kiddie Tax Doesn't Apply to W-2 Wages

Kiddie tax applies only to unearned income. W-2 wages from your business are earned income and not subject to kiddie tax.

Sole Proprietorship (and Single-Member LLC Taxed as a Sole Prop)

Filing on Schedule C makes this the most tax-favored structure for paying your minor children.

A. Payroll Tax Rules for Kids

• Under 18: No FICA (Social Security & Medicare)
• Under 21: No FUTA
• Income tax rules still apply

B. Practical Checklist for Sole Props (2025)

• Get or use an EIN for your sole prop (not your SSN).
• Set them up like a real employee (W-4, I-9, CA DE4, etc.).
• Pay at least CA minimum wage ($16.50/hr in 2025) or your city's higher rate.
• Track hours and duties with timesheets and job descriptions.
• Mark them as a family employee for payroll tax purposes where allowed.
• Issue a W-2 by January 31 and deduct the wages on Schedule C.

C. Simple Example

• You pay your 16-year-old $10,000.
• No federal income tax due to the child's standard deduction.
• No FICA or FUTA because of the family employee rules.

Result:

• You get a $10,000 business deduction.
• Your child gets $10,000 of earned income for savings, investing, or expenses.

S-Corporation Paying Your Kids

S-corporations do not qualify for the FICA/FUTA family exception. Kids are treated as regular employees.

What That Means in Practice

• All wages are subject to FICA.
• All wages are subject to FUTA.
• Normal state payroll and unemployment rules apply.
• Normal W-2 and payroll reporting required.

Planning Tips

• Pay only for real, documented work.
• Your own reasonable salary requirement does not change.
• Using the child's standard deduction may still make wages tax-efficient.
• Consider using wages to fund a Roth IRA or savings.

Multi-Member LLC (Taxed as a Partnership)

Case A: Both Partners Are the Child's Parents

• No FICA for under-18 wages.
• No FUTA for under-21 wages.
• Similar treatment to a sole prop for family employees.

Case B: Any Partner Is Not a Parent

• Full FICA and FUTA apply on the child's wages.
• The LLC still deducts wages, but payroll tax benefits are lost.

If the Child Is an Owner

Children who are members of an LLC are not employees for their ownership income. Income is usually reported on a Schedule K-1 or as guaranteed payments, not W-2 wages.

How Much Should I Pay My Child in 2025?

1. Start From the Work

• List tasks, estimate realistic hours per week.
• Use at least $16.50/hr (CA minimum wage in 2025) or your city's higher rate.

2. Target the Standard Deduction

• Aim to keep wages within the child's standard deduction so income tax at their level stays minimal or zero.

3. Match to Your Entity Type

• Sole prop / parents-only partnership: most efficient for payroll taxes.
• S-corp or LLC with non-parent partners: payroll taxes still apply.
• Parents-only LLC: may get similar treatment to a sole prop.

4. Use the Income Strategically

• Fund a Roth IRA.
• Save for college or trade school.
• Cover sports, car insurance, and other teen expenses.

Bonus: Opportunities Payroll Opens Up for Your Child

Paying your children through proper payroll doesn't just create tax savings -- it opens up long-term financial, educational, and developmental advantages for them.

1. Potential Eligibility for Social Security Credits

When a child has legitimate W-2 wages that are subject to payroll tax, they may start building a Social Security earnings history. Over time, this can matter for retirement, disability, and Medicare purposes.

2. Ability to Open and Fund a Roth IRA

Earned income unlocks the ability to contribute to a Roth IRA.

• They can contribute up to the amount of their earned income (within annual Roth limits).
• Tax-free growth over decades.
• Parents can gift the cash while the contribution is made in the child's name.
• Funds can be used later for retirement, a first home, or certain education costs.

3. Building Real Financial Responsibility

Having real wages gives your child the chance to learn how money actually works:

• Budgeting, saving, and tracking spending.
• Understanding paychecks, taxes, and deductions.
• Setting money aside for specific goals.

4. Resume, Work Experience & Skills

Working in your business gives your child legitimate experience they can put on applications and resumes:

• Demonstrated work history and responsibility.
• Skills in admin, tech, marketing, social media, or customer service.
• Better positioning for future jobs, internships, or programs.

5. Sharing Real-World Family Expenses

Children can use their own earnings to cover things like sports, clubs, car insurance, or savings for a car or college, shifting some costs off of your after-tax dollars.

6. Involving the Next Generation in Your Business

Kids who work in the family business often gain:

• Pride in contributing to something bigger than themselves.
• Understanding how a business operates.
• Interest in entrepreneurship and financial literacy.

Can I 1099 My Kids Instead of Putting Them on Payroll?

1. Yes, It's Allowed -- If They Truly Are Contractors

A child can receive a Form 1099-NEC only if the facts support true independent contractor status:

• They perform actual business services for your business.
• The work is project-based or independent, not controlled like an employee job.
• They meet standard contractor criteria (control over how/when they work, may use their own tools, not tightly supervised).

This rarely fits younger kids. The IRS will almost always view children working in a parent's business as employees, not contractors.

2. When You Should Not Issue a 1099 to Your Child

You should not issue a 1099-NEC if:

• The child is doing normal employee-type tasks, such as:
  • Cleaning the office
  • Filing paperwork
  • Running errands
  • Helping with admin tasks
• The child does not run their own separate business.
• The child is under 18 and working in a parent's sole proprietorship, where employee treatment gives better payroll tax benefits anyway.

These are all strong indicators that the correct treatment is W-2 employee, not contractor.

3. Why Hiring Your Child as an Employee Is Usually Much Better

If you're a sole proprietor (Schedule C), treating your child as an employee typically gives you:

• No FICA (Social Security/Medicare) on wages while they're under 18 (if you qualify under family employee rules).
• No FUTA on their wages while they're under 21.
• Full wage deduction to your business.
• Income shifted to your child, who may owe little or no income tax up to their standard deduction for the year.

In most real-world scenarios, paying your child as a W-2 employee beats issuing them a 1099.

4. When a 1099 Might Be Appropriate

This is uncommon but possible for older kids or young adults with real, independent skills:

• Your child runs a small graphic design or branding business.
• Your child does freelance video editing with multiple clients.
• Your child offers social media or content services as an independent business.

In those situations:

• Pay them the same way you would any other outside contractor.
• Issue a 1099-NEC if you pay them at least $600 during the year.

5. Quick Cheat Sheet

When to Bring This to Tandy Consulting Inc.

This guide is for general education. The rules are detailed, and 2025 brings new federal and California updates.

We should work together if:

• You have an S-corp or multi-member LLC.
• You want your child to become an owner (shares or units).
• Your child has other income or investments.
• You want to coordinate Roth IRA or college planning with wages.
• You need payroll services.
• You need a State Payroll ID number.