What must be considered when owners of a company hire their minor children as employees to perform services for compensation?
Author: Richard Hunt
April 27, 2026
What must be considered when owners of a company hire their minor children as employees to perform services for compensation?
When executed properly, hiring minor children can be an effective way to shift income from a high tax bracket business to a lower tax bracket child, while keeping the arrangement defensible under IRS scrutiny.
Compensation paid to an owner’s child must be the result of a bona fide employment relationship for actual services rendered. Payments that are not in fact for services rendered, or are disguised gifts or support, are not deductible as compensation expenses. Proof of a contract for services rendered, actual performance, and a reasonable probability that payment was intended when the contract was made must exist. The employee (child) must have a genuine legal obligation to render services, and the employer (parent/business) must have a genuine legal obligation to pay.
The deduction for compensation paid is limited to the amount that would be reasonable under all circumstances. Reasonable compensation is the amount that would ordinarily be paid for like services by like enterprises under like circumstances. The IRS has the authority to determine whether compensation is reasonable, while the taxpayer bears the burden of demonstrating the IRS’s determination is erroneous. If compensation is found to be excessive, the disallowed amount may be recharacterized as a gift, dividend, or other non-deductible payment.
Moreover, the business must maintain adequate records to substantiate that the child performed services, the nature of those services, the hours worked, and the rate of pay. Payments should be made in the same manner as for other employees (e.g., regular payroll with appropriate withholdings). In practice, this strategy works best as part of a broader tax plan—not as a standalone tactic. When integrated properly, hiring minor children can simultaneously support family wealth planning, teach financial responsibility, and produce meaningful tax savings without violating federal tax law.
