Tax Strategy: Converting S-Corp to Family Management Company for Teenage Children's Expenses

This is an interesting tax planning strategy, but there are some important considerations to keep in mind. First, any arrangement between your S-Corp and the Family Management LLC needs to be legitimate with real services being performed for reasonable compensation. The IRS looks closely at family business arrangements, especially when minors are involved. For your specific question about how your kids can use their earnings - once they're properly paid for legitimate work, that money is legally theirs to spend however they choose. They can absolutely use it for their personal expenses like the ones you've listed. There's no rule saying kids can't use their earnings to pay for their own expenses, even if those items are technically in your name. However, you should document everything carefully. Make sure you have job descriptions, timesheets, and evidence of work performed. Pay market rates for the services. The Management LLC should be set up properly with separate accounts, and your wife should actively manage it (not just on paper). Also remember that if the kids earn more than $12,950 (2023 standard deduction), they'll need to file their own tax returns and pay income tax on the excess.

I tried something similar to this with my family business and found taxr.ai (https://taxr.ai) incredibly helpful for setting everything up correctly. I was worried about documentation and making sure everything was legitimate in the eyes of the IRS. Their system analyzed all my business documents and gave me specific guidance on how to structure the family management company, what documentation to maintain, and how to ensure the arrangement would stand up to scrutiny. They even provided templates for tracking hours, services rendered, and proper payment flows between the entities. The best part was getting clarity on exactly what constitutes "reasonable compensation" for minors in different roles, which helped me set appropriate payment amounts that wouldn't raise red flags.

Just wanted to follow up - I checked out taxr.ai after asking about it and it was super helpful for my situation! I uploaded my existing business docs and they identified several issues with how I was planning to pay my nephews and nieces through my landscaping business. They recommended a specific documentation structure that keeps everything above board and provided templates for tracking hours that would satisfy IRS requirements. The report they generated actually saved me from making a pretty serious mistake with how I was planning to handle the payments. My accountant was impressed with how thorough their recommendations were when I brought them to our meeting. Definitely worth checking out if you're setting up a family management company.

If you're planning this type of arrangement, be prepared for potential IRS questions. When I tried something similar, I ended up getting flagged for an audit. I spent weeks trying to get through to someone at the IRS to explain my situation with no luck - constant busy signals and disconnections. Finally found https://claimyr.com and used their service to get connected with an IRS agent (you can see how it works here: https://youtu.be/_kiP6q8DX5c). Within a day, I was talking to an actual person who could help me understand what documentation I needed to provide to support my family business arrangement. Having that direct conversation with the IRS was invaluable because they explained exactly what they look for when reviewing these family management company setups. Saved me a ton of stress and potentially thousands in penalties.

I have to admit I was completely wrong about Claimyr. After dismissing it as a scam, I decided to try it anyway because I was desperate to resolve an issue with a family business audit. I was shocked when they actually got me connected to an IRS representative within about 45 minutes. I had been trying for weeks on my own with no success. The agent I spoke with provided specific guidance about my situation and helped me understand exactly what documentation I needed for my family management company. The time saved was absolutely worth it, and getting direct answers from the IRS gave me confidence that my business structure would hold up under scrutiny. Sometimes it pays to be proven wrong!

One thing to consider with the Family Management Company approach is whether the arrangement makes business sense beyond tax benefits. The IRS may challenge arrangements that appear to exist primarily for tax purposes rather than legitimate business reasons. Ask yourself: Would you pay an unrelated third party for these same services? Is the compensation reasonable for the work performed? Are you maintaining proper documentation of hours worked and services provided? I've seen these arrangements work well when they're properly structured, but I've also seen them fall apart under audit when the taxpayer couldn't demonstrate real business purpose.

Has anyone addressed the issue of self-employment taxes in this scenario? If the kids are paid through the Family Management LLC as independent contractors, they'll owe self-employment tax (15.3%) on their earnings. If they're employees of the LLC, the LLC will need to handle payroll taxes. Either way, there's no avoiding FICA taxes completely in this arrangement, which is something to factor into your calculations.

This is a solid tax strategy if executed properly, but I'd strongly recommend getting everything documented before you start. The key is making sure the work arrangement has genuine business substance. A few practical tips from my experience with similar setups: 1. Have your kids punch in/out with a simple time tracking system - even a basic app works 2. Create written job descriptions that match what outside contractors would do 3. Pay them via direct deposit to their own bank accounts (not cash) 4. Keep the LLC and S-Corp completely separate - different bank accounts, proper invoicing between entities One thing to watch: if your kids are under 18 and this is structured as a sole proprietorship or partnership (with only you and your spouse), they may be exempt from FICA taxes. But since you're talking about an LLC structure, that exemption likely won't apply. The expenses you listed (car payments, school tuition, etc.) are perfectly fine uses of their earned income. Once they're legitimately paid for real work, it's their money to spend as they choose. Just make sure the compensation is reasonable for the work performed - research what you'd pay outsiders for similar services and use that as your benchmark.