Kiddie Payroll: A Useful Strategy When Done Correctly
Kiddie payroll is one of those strategies that comes up a lot with business owners. It can be effective, but it’s also one of the more misunderstood areas of tax planning.
When it’s structured properly, it can allow a portion of income to be shifted into a lower tax bracket, and in some cases avoid payroll taxes. It can also create an opportunity to start funding a Roth IRA for a child at an early age.
That said, this isn’t something we approach casually. The details matter, and the execution matters even more.
When This Strategy Actually Makes Sense
Kiddie payroll tends to work best for:
- Business owners (LLCs, S Corporations, sole proprietors)
- Higher income households where shifting income has a meaningful impact
- Families where children can actually contribute to the business in a real way
This is not a universal strategy. In a lot of situations, it either doesn’t apply or doesn’t move the needle enough to justify the effort.
When It Doesn’t
We don’t recommend this in situations where:
- There’s no legitimate work for the child
- The business doesn’t have enough activity to support it
- The goal is just to create a deduction without substance
If the child isn’t actually working, it’s not something we’re going to do.
The Core Requirement: Real Work
The IRS allows you to pay your children, but the work has to be legitimate and tied to the business.
That might include:
- Helping with marketing or social media
- Being included in photos or video content
- Administrative or organizational tasks
- Creative work tied to branding or operations
We help define what that looks like, but ultimately the work has to exist and be used by the business.
How Compensation Is Structured
We don’t typically use arbitrary hourly rates, especially for younger children.
Instead, compensation is usually structured based on:
- Daily or session-based work
- Project-based deliverables
- Reasonable annual totals tied to actual output
That tends to be more realistic and easier to support if questions ever come up.
Payroll Setup
For these situations, we generally use ADP.
The main reason is consistency and compliance. They handle:
- Proper payroll reporting
- W-2 issuance
- Payroll tax treatment, including FICA considerations where applicable
There are cheaper options, but this isn’t an area where we want to cut corners.
What the Process Looks Like
At a high level, this is how it typically works:
1. Setup
Confirm the strategy makes sense, define the role and scope of work, set compensation, and establish payroll.
2. During the Year
Payroll is run periodically, funds are transferred to the child, and the work is performed and documented.
3. Year-End
A W-2 is issued, wages are deducted by the business, and in many cases federal tax is minimal or zero.
4. Tax Filing
A return is filed for the child, which is usually straightforward.
5. Planning Opportunity
In some cases, families choose to fund a Roth IRA using the earned income.
Documentation Matters
We provide structure and guidance, but the documentation ultimately sits with the client.
That includes:
- What the child’s role is
- What work was performed
- When it was performed
It doesn’t need to be overly complicated, but it does need to exist.
A Quick Note on Social Security
It’s not uncommon for the Social Security Administration to follow up when a minor has reported wages.
They’re typically just verifying:
- The work was real
- The wages make sense
It’s a routine process, but it’s another reason why documentation needs to be in place.
Final Thoughts
Kiddie payroll can be a useful tool, but it’s not something we apply automatically. It needs to make sense for the business, and it needs to be implemented correctly.
When it does fit, it can:
- Reduce overall tax liability
- Create an early opportunity for savings or investing
- Introduce kids to working in a structured way
But like most things in tax, the benefit comes from doing it properly—not just doing it.