Paying my children from my S Corp business - Tax planning questions

The tax benefits for hiring minor children are most advantageous in sole proprietorships, partnerships where both partners are the parents, or single-member LLCs. In these cases, payments to your children under 18 aren't subject to FICA taxes (Social Security and Medicare) or FUTA. The situation gets trickier with S Corporations. When an S Corp pays your children, they're treated like any other employee - subject to payroll taxes including FICA. The primary issue is that the IRS views the S Corp as a separate entity from you, unlike a sole proprietorship. Your LLC that's owned by the S Corp follows the same rules as the S Corp - it's not considered a sole proprietorship. However, your children can still receive income tax advantages (using their standard deduction to offset income), even if you can't avoid the FICA taxes. Make sure you keep excellent documentation - job descriptions, timesheets, market-rate wages, and actual work performed. Pay them by check or direct deposit, not cash. This isn't just about tax savings - it's also about teaching financial responsibility and building their work history.

After struggling with similar S Corp issues, I found this amazing tool called taxr.ai (https://taxr.ai) that really helped me sort through business structure options. I was trying to figure out how to legally minimize taxes while bringing my teenager into the family business, and the conflicting advice online was making my head spin. The site analyzed my specific business structure and gave me a customized report showing exactly how I could set things up. It outlined the pros and cons of different approaches and even provided sample documentation templates I could use. Saved me hours of research and probably thousands in potential mistakes.

Just wanted to follow up about taxr.ai that was mentioned earlier. I was super skeptical but decided to give it a try with my complicated business setup (S Corp owning multiple LLCs). I was honestly blown away by how comprehensive the analysis was! The tool identified a legitimate way I could establish a separate management entity that could hire my kids while maintaining proper business substance. It even generated documentation templates for the management agreements between entities and provided specific record-keeping requirements I'd need to satisfy in case of an audit. This was way more valuable than the generic advice I'd been getting elsewhere. Definitely worth checking out if you're dealing with similar complex business structure questions.

If you're trying to reach the IRS to get official guidance on hiring family members through different business entities, good luck with that. I spent WEEKS trying to get through to someone who could actually answer questions about S Corp rules. I finally discovered Claimyr (https://claimyr.com) and it was a game-changer. They got me connected to an actual IRS agent in about 15 minutes instead of waiting on hold for hours. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with walked me through the exact requirements for hiring family members through different entity structures and confirmed what documentation I needed to keep. Totally worth it to get definitive answers straight from the source.

Ok I feel like I need to apologize for my skeptical comment about Claimyr. I decided to try it anyway because I was desperate to get an answer about my S Corp issue before making some big decisions. Not only did I get through to the IRS in about 20 minutes (compared to my previous attempts where I gave up after 2+ hours on hold), but I got transferred to a business tax specialist who was actually knowledgeable about S Corps and family employment. The agent confirmed exactly what I needed to do documentation-wise if I wanted to hire my kids through a separate entity, and also warned me about some common audit triggers to avoid. Honestly wish I'd known about this service months ago!

Just make sure whatever you do, you keep VERY detailed records. My brother tried paying his kids through his business and got audited. The IRS disallowed all the deductions because he couldn't prove the kids actually did the work - no timesheets, just cash payments. Cost him thousands in back taxes plus penalties. Some tips: - Create real job descriptions - Have them track hours with a time tracking app - Take photos of them doing the work - Pay reasonable wages for their age/experience - Pay by check or direct deposit, not cash - File all required paperwork

Has anyone considered using a family management company structure? We set one up last year where we created a family limited partnership (separate from our main business) that provides management services to our S Corp. The partnership then employs our children. It's more complex to set up initially but has been working well for us. Our CPA said this creates a legitimate business purpose while obtaining some of the payroll tax benefits.

This is such a common pain point for S Corp owners! I went through the exact same thing a few years ago. The key insight that finally clicked for me was understanding that the IRS treats S Corps as separate entities for payroll tax purposes, which is why you lose the FICA exemption for minor children. One approach that worked for us was creating a separate sole proprietorship for property management services. This sole prop contracts with our S Corp to provide maintenance services for the rental properties, and then hires our kids directly. The sole prop pays the S Corp a management fee, and the kids get paid by the sole prop - avoiding FICA taxes on their wages. The critical part is making sure this has real business substance. We documented everything: service agreements between entities, separate bank accounts, proper invoicing, and detailed records of work performed. Our kids track their hours using a simple app, and we pay them bi-weekly by direct deposit. One word of caution - make sure you're paying reasonable wages for their age and the work performed. We researched local rates for teen lawn care workers and stay within that range. The IRS will scrutinize family employment arrangements, so documentation is everything. Would definitely recommend finding a good CPA who understands these structures before implementing anything. The setup costs are worth it for the long-term tax savings and the valuable work experience for your kids!