How Much Should You Pay Your Kids?

A practical guide to setting reasonable, IRS-safe compensation for children working in your family business

When we first began paying our children through our family business, we didn’t start with the maximum.
We started with a question:

“What would someone else pay a child to do this?”

That question became our north star. Because when it comes to paying your children legally and ethically, the goal isn’t just to move money around. The goal is to assign value to contribution—in a way that’s fair, defendable, and scalable.

In this post, we’ll break down:

• What “reasonable compensation” means for children
• How much you can legally pay per year
• What the IRS expects if you get audited
• How we set pay rates in our family business
• Mistakes to avoid when structuring compensation

First: Know the Limits

As of 2024, you can pay your minor child up to $13,850/year tax-free, assuming:

1. They work for your parent-owned business (LLC or sole proprietorship)
2. The business is not taxed as a corporation (S- or C-Corp loses some benefits)
3. The compensation is for real, documented work*
4. You follow all reporting, withholding, and recordkeeping rules
   Many families don’t hit the full $13,850 cap, and that’s okay.
   We didn’t start there either. The real key is matching pay to role.

What “Reasonable Compensation” Actually Means

The IRS standard is clear: pay must be reasonable for the services performed.
That means if your 4-year-old appears in a few animated videos, you can’t pay them $20,000 and claim it’s normal.
But how do you define “reasonable” when your child is the brand? Or the model? Or the character?
That’s where you use comparables.

Use Market Comparisons

Here are some real-world comps we used to inform our child pay rates:

• Child voice talent: $150–$500 per finished minute
• Kid modeling sessions: $250–$1,000 per session (plus licensing)
• Brand usage for child likeness: $1,000–$5,000 depending on media reach
• YouTube ad revenue share for child content: varies wildly, but even moderate channels earn $500–$2,000/month from child-led content
  We looked at those numbers, then asked:
  How many minutes per month? How many books or videos? What’s the exposure?
  Then we set flat monthly compensation tied to their actual presence in our media and content pipeline.

How We Did It (Real Numbers)

We paid our young children $500/month each for consistent work like:

• Appearing in 2–4 videos per month
• Providing voice samples (5–10 minutes)
• Serving as the face and name of branded characters
• Appearing in posters, merchandise, and books

This gave us a clean, consistent ledger:

• $6,000 per child per year (well below the tax-free cap)
• Logged monthly with deliverables attached
• Supported by screenshots, scripts, and distribution proof

Pay Should Match the Role (Not the Age)

The IRS cares more about work and output than age.
A 2-year-old model used for 12 books might be worth more to a business than a 12-year-old assistant folding merch once a month.
The key is to tie compensation to business value, not just to age or effort.

Examples:

• A toddler whose likeness appears in a viral video series? Justifiable pay.
• A 7-year-old doing 2 hours of weekend packaging? Justifiable pay.
• A 15-year-old handling 10 hours/week of social media strategy? Definitely justifiable pay.
  What’s not justifiable:
  Paying a child $10,000/year to “learn about business” without doing anything specific.

Structure Matters

Here’s how to structure your child’s pay:

1. Create a contract (simple is fine — include services, pay, timeline)
2. Log each month’s output — screenshots, audio, photos, work summaries
3. Issue payments to a business checking account
4. Transfer to custodial accounts (UTMA or Roth IRA if eligible)
5. Track everything for year-end W-2s or contractor summaries
   We used payroll software to issue formal W-2s, but if your children are under 18 and you’re operating as a sole prop or disregarded LLC, you can avoid Social Security/Medicare withholding.
   (Still check with your CPA or local accountant.)

Common Mistakes to Avoid

1. Overpaying Without Support

Don't jump to $13,850 just because it's tax-free. Start small, scale with proof.

2. Not Documenting Work

Even if the work is creative or image-based, you need logs. The IRS doesn’t “assume” it happened.

3. Paying in Lump Sums

This raises red flags. Spread payments over the year as payroll or monthly transfers.

4. Mixing Personal and Business Accounts

Keep payments clean. Your LLC should pay from its own business account, not your personal funds.

What Happens If You’re Audited?

If the IRS reviews your setup, they’ll want to see:

• That your child did actual work
• That the work was relevant to the business
• That pay was comparable to market rates
• That you kept documentation (photos, audio, project logs, etc.)
• That payment went to the child (not just into your pocket)
  In other words: treat your child like an employee. Just a small, adorable one.

Final Thought: It's About More Than Money

Yes, paying your kids can help you reduce taxable income.
Yes, it can help you build wealth early through Roth IRAs or investment accounts.
But it also sends a message:

“You are part of this. Your presence, your creativity, your contribution—it matters.”
And that’s worth more than any tax deduction.

Next post: How we document each child’s work, week-by-week, using shared family logs, templates, and tools anyone can use.

Disclaimer: The information provided in this post is for general educational and informational purposes only. It is not intended as, and should not be construed as, financial, legal, tax, investment, or other professional advice. You should consult with your own qualified advisors before making any financial decisions. We disclaim all liability for any actions taken based on the content provided.