A simple guide for families building smart systems

You’ve decided you want to pay your kids legally.

You’re building something: a business, a brand, a system of your own.
You’re ready to do it right — with clean records, payroll, and real strategy.

But one big question remains:

What kind of business do you actually need?

And does it matter whether you set up an LLC, a sole proprietorship, or something else entirely?

The short answer is yes — it matters a lot.

In this post, we’ll break down:

• Which structures work best if you want to hire your kids
• Common mistakes that blow up compliance
• How we chose our setup
• And what we’d change if starting over today

Why Structure Matters

When you’re paying minor children (under 18) to work in your business, the business’s legal structure affects:

• Whether you owe payroll taxes (Social Security, Medicare)
• Whether the wages are deductible
• How much audit scrutiny you’re exposed to
• How easy it is to manage payments year after year

Choosing the wrong structure can:

• Cause you to overpay taxes unnecessarily
• Make the payroll setup overly complex
• Risk disallowing the wage deduction if audited

Choosing the right structure lets you:

• Save on taxes legally
• Pay your kids easily
• Keep compliance simple and safe

Best Business Structures for Family Payroll

If your goal is to pay your kids tax-free, these structures are ideal:

Sole Proprietorship

The simplest setup.

• Owned by you individually (no legal separation)
• Profits and losses flow through to your personal tax return
• You can hire your kids under 18 without owing Social Security/Medicare (FICA) taxes

Pros:

• Easiest to set up
• No separate corporate tax filings
• Clean for IRS family wage rules

Cons:

• No legal protection — your personal assets are exposed
• Harder to scale if you grow beyond side hustle level

LLC Taxed as a Disregarded Entity

This is what we use.

• You form an LLC for legal protection (your assets are shielded)
• Single-member LLC: the IRS treats it like a sole proprietorship for tax purposes
• Same FICA exemption for paying your kids

Pros:

• Legal liability protection
• Still qualify for paying kids without extra taxes
• Professional appearance for contracts, vendors, banks

Cons:

• Annual state fees (varies — $50 to $800 depending on your state)
• Requires basic maintenance (registered agent, annual report)

Partnership (for Spouses)

If both parents are co-owners.

• LLC taxed as a Qualified Joint Venture (if married filing jointly)
• Still treated like a sole prop for IRS purposes
• Kids’ wages still exempt from FICA taxes

Pros:

• Both parents can formally participate
• Spreads ownership for estate and planning purposes

Cons:

• Slightly more complex filings
• Must maintain a clear partnership agreement (even if simple)

What to Avoid

C Corporations

• Your business is taxed separately.
• Paying your kids through a C Corp triggers payroll tax withholding (FICA and FUTA apply).
• Way more paperwork, double taxation issues if you’re distributing profits.

Summary: unnecessary complexity unless you’re running a multi-million-dollar enterprise.

S Corporations

• S Corps are popular for small businesses but problematic here.
• If you pay your kids through an S Corp, you must withhold Social Security and Medicare taxes — even if they’re your children.
• No FICA exemption.

Summary: great for owner salary optimization, bad for paying minor children tax-free.

Real-World Example: How We Structured It

We formed a Single-Member LLC taxed as a disregarded entity.

• Legal name: Professional business-sounding name
• DBA (“Doing Business As”): More creative, public-facing brand
• EIN from IRS
• Business checking account
• Simple operating agreement

Kids’ involvement:

• Paid monthly via payroll software
• Assigned work categories (likeness licensing, creative contribution)
• No payroll taxes withheld due to FICA exemption
• Funds deposited into custodial accounts

Result:

• Clean separation of personal and business finances
• Real work, real payment, real deductions
• Full documentation for every payment and project

FAQs About Business Structures and Family Payroll

Can I just pay them through my personal bank account?

No. To deduct wages, it must be a real business with proper accounting.
Wages paid from personal funds without formal structure are non-deductible.

Does it matter which parent owns the business?

Not really — but if it’s jointly owned, document it clearly.
Both parents can operate under a joint LLC or partnership if preferred.

Do I need an accountant to do this?

Strongly recommended — at least for setup.
A tax-savvy CPA can help you:

• Confirm your business structure
• Set up the right payment flows
• Prepare W-2s and handle end-of-year compliance

Final Thought: Keep It Simple — and Strong

You don’t need a $5,000 legal setup to pay your kids smartly.

Most families just need:

• A clean sole proprietorship or single-member LLC
• A real business purpose
• A documented system of work and payment

Get the foundation right now, and everything else — Roth IRA contributions, family investment plans, tax reduction — becomes easier later.

Next post: How to actually open the right custodial accounts for your kids' paychecks — and why starting early beats every 529 plan on the market.

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.