Whether it's your medical practice or a real estate entity, paying your kids is a great way to teach discipline, responsibility, and work ethic to your children. In addition, it is often a very underutilized tax strategy that has some great tax benefits. For starters, it shifts income from your top marginal rate (37% federal for many physician households, plus state tax) to your child's rate, which is often zero. Your child likely pays no federal income tax on those wages: for 2026, wages up to the $16,100 standard deduction for a single filer are fully sheltered, and wages are earned income, so the kiddie tax does not apply to them. Even better, in a parent's sole proprietorship (or a partnership where each partner is the child's parent), wages to your child are exempt from Social Security and Medicare taxes until the child turns 18, and exempt from federal unemployment tax (FUTA) until the child turns 21. Additionally, it is a great way to transfer money to your children without gift tax consequences and it also gives your child earned income, which is what allows an IRA contribution: for 2026 they can put in the lesser of their wages or $7,500. See our Roth IRA for Kids guide for the account setup steps. The benefits will truly grow exponentially over time.

Step 1: Identify Your Business Structure

Why: Your business structure determines the methods and tax benefits available when employing your child.

What to Do:

  • Sole Proprietor: If a sole proprietor (i.e., Schedule C), wages to your child are exempt from Social Security and Medicare taxes until the child turns 18, and exempt from federal unemployment tax (FUTA) until the child turns 21. The same exemptions apply if the business is a partnership in which each partner is a parent of the child, for example a husband-and-wife LLC taxed as a partnership. However, we would still recommend having all the formalities that you would have for any employee. This means setting them up on payroll, ensuring funds are paid from the business account to their account, and issuing W2s at the end of the year.

  • S Corporation/Professional Corporation (PC): Your child must be added to the formal payroll system just like any other employee. Since a corporation is separate from its owner, the wages paid to your child would be subject to Social Security & Medicare, even if the business is 100% owned by a parent of the child.

Step 2: Confirm Legal Eligibility & Compliance

What to Do:

  • Sole Proprietor:

    • Verify that IRS family employment rules apply (e.g., wages to children under 18 are exempt from FICA taxes, and the FUTA exemption runs until the child turns 21).
    • Review state labor laws (minimum age, work hours, and any required permits or work certificates).
    • Ensure required state withholding is set up. You should also check to see if your state has any required unemployment insurance or PFML (paid family and medical leave) contributions.

  • S Corp:

    • Confirm internal corporate policies or board resolutions authorize hiring a family member.
    • Ensure required state withholding is set up. You should also check to see if your state has any required unemployment insurance or PFML (paid family and medical leave) contributions.
    • Ensure compliance with all Federal, state, and local labor laws.

Step 3: Define the Role & Create a Job Description

Why: A clear job description validates the employment arrangement and supports the wage as a legitimate business expense.

What to Do:

  • Write a detailed description of the tasks your child will perform. For a physician business, this could be tasks such as filing, administrative support, phone answering, scheduling, office work. If you have a real estate LLC that you would like to use to employ your child, wages could be paid to your child for real estate related activities such as collecting rent, bookkeeping, advertising, cleaning, maintenance and repairs, etc.
  • Specify expected work hours and schedule (e.g., after school or on weekends).
  • Document how this role benefits your business.
  • Draft an employment contract

Step 4: Determine Reasonable Compensation

Why: Setting a fair, market based wage is essential for IRS approval and to ensure the wages are deductible. Remember, the IRS only allows a deduction for ordinary and necessary business expenses that are not unreasonable.

What to Do:

  • Research comparable wage rates using job postings or local benchmarks.
  • Set an hourly rate or salary that reflects the tasks performed.
  • Document your research and rationale for the wage for future audit defense.
  • Keep in mind that the IRS can disallow any expenses that are unreasonable. For that reason, a fair market wage should be paid based on the work performed and the current market.

Step 5: Add Your Child to Payroll in Gusto

Why: Putting your child on regular payroll streamlines process and compliance.

How it works: We’ll add your child as an employee in Gusto. Gusto automatically handles the Form W-4, Form I-9, new hire report, tax withholding, and year end W2. No extra paperwork for you. Just approve the payroll.

Step 6: Maintain Documentation

What to Do:

  • Keep a copy of the job description and any internal approvals (e.g., board resolutions).
  • Retain detailed timesheets or work logs that document your child’s hours and tasks.
  • Save copies of all hiring forms (Form W-4, Form I-9), payroll records, and payment receipts.
  • Document your wage research and rationale behind the compensation rate.
  • Organize these documents in a dedicated folder for easy retrieval.

Step 7: Review and Adjust Annually

Why: Regular reviews help ensure the employment arrangement remains compliant with current laws and that compensation reflects any changes in your business needs.

What to Do:

  • Annually reassess the child’s role, hours worked, and wage rate.
  • Update timesheets, job descriptions, and payroll records as necessary.
  • Verify that all filings and documentation meet the latest IRS and state requirements.