The Complete DIY Guide to Legally Employing Your Child

You've heard the pitch: hire your kids, deduct their wages, fund their Roth IRA, save on taxes. It sounds almost too good to be true. And while it is legal and powerful, the execution is where most parents get tripped up.

This guide walks through every step of doing it yourself -- the entity formation, payroll setup, IRS rules, record-keeping requirements, and the real costs nobody talks about. Then we'll explain why we built KidsBuild to handle all of it.

Step 1: Form a Business Entity

The IRS allows parents to pay children under 18 without owing FICA taxes (Social Security and Medicare) -- but only if the business is a sole proprietorship or a partnership where both partners are the child's parents. This is IRC Section 3121(b)(3)(A).

If your business is an S-Corp or C-Corp, the FICA exemption does not apply. Your child's wages will be subject to the same payroll taxes as any other employee.

• Sole proprietorship or spousal LLC: FICA exempt for children under 18
• S-Corp or C-Corp: no FICA exemption, full payroll taxes apply
• LLC taxed as S-Corp: no exemption (follows entity taxation, not formation)

Cost: LLC formation fees range from $50 (Kentucky) to $500 (Massachusetts). Annual renewal fees add $0-$300/year depending on your state.

Step 2: Get an EIN

Apply for an Employer Identification Number from the IRS. This is free and takes about 5 minutes online at irs.gov. You'll need this before you can run payroll.

Step 3: Set Up Payroll

Even though you're paying your own child, the IRS expects you to run proper payroll. That means:

• W-4 filled out by your child (or you on their behalf)
• Regular pay schedule (biweekly or monthly)
• Paystubs with hours, rate, gross/net pay
• Federal and state income tax withholding (if applicable)
• W-2 issued by January 31st each year

Cost: DIY payroll software like Gusto starts at $40/month + $6/person. That's $552/year minimum just for the payroll platform. QuickBooks Payroll is similar.

Step 4: Document Everything

The IRS has flagged "employing your children" as a common audit trigger. The #1 thing they look for: legitimate work for reasonable pay. You need:

• Written job description with specific duties
• Time logs showing dates, hours, and tasks performed
• Work product evidence (screenshots, commits, deliverables)
• Pay that matches market rates for the work (not inflated)
• Regular payment schedule (not lump sums)

This is where most DIY setups fail. Parents pay their 14-year-old $25,000/year to "help with the business" but have no time logs, no deliverables, and no evidence of actual work performed. The IRS reclassifies the wages as a gift, and you lose the deduction plus owe penalties.

Step 5: Pay a Reasonable Rate

What's "reasonable"? The IRS doesn't publish a rate table, but they do compare to market rates. A 14-year-old doing basic data entry? $12-15/hr is defensible. A 17-year-old building full-stack web applications with AI tools? $28-40/hr is reasonable given current freelance market rates for junior developers.

We break this down in detail in our companion article: What Should You Pay Your Teen Developer?

The Real Cost of DIY

Let's add it up for one year:

And that doesn't include the risk of getting it wrong. An IRS reclassification means you owe back taxes, penalties (up to 75% of underpayment), and interest.

Why We Built KidsBuild

KidsBuild replaces the entire stack above for $20/month. We provide the business entity structure, automated time tracking with task-level descriptions, experience-based rate progression that's always within defensible market ranges, automated monthly invoicing, and exportable records for tax filing.

Your child logs real hours on real projects. The platform generates the documentation trail the IRS expects. And because we use ACH payments (0.8% capped at $5/tx), more money goes to your child's development instead of credit card processing fees.