Last updated: January 2026
Hiring your children can save your family thousands in taxes. But the IRS knows this, and they scrutinize family employment arrangements more closely than regular hires.
The difference between a legitimate deduction and a disallowed expense often comes down to one thing: documentation.
Here's what records you need to keep and how to organize them.
Why Documentation Matters
When the IRS examines family employment, they're looking for:
- Legitimate work: Did the child actually perform real business tasks?
- Reasonable wages: Are they paid fairly for the work done?
- Proper treatment: Was this handled like real employment?
Without documentation, you have no way to prove these things. The IRS can disallow the entire deduction, and you'll owe back taxes, interest, and potentially penalties.
Good records protect you.
The Essential Records
1. Job Description
Create a simple document with:
- Job title
- Specific duties and responsibilities
- Expected hours per week
- Pay rate
The job description proves the work is real and defined, not vague "helping out."
Example:
Job Title: Office Assistant
Responsibilities:
- Shred documents (2 hrs/week)
- Organize filing cabinet (1 hr/week)
- Sort mail (30 min/week)
- Clean office space (1.5 hrs/week)
Schedule: Saturdays, approximately 5 hours
Pay Rate: $12/hour
2. Time Records
Keep a record of:
- Dates worked
- Hours worked
- Tasks performed
Complete these regularly (not months later), and be specific about tasks.
Example:
Saturday, March 15: Shredded documents from archive boxes (1.5 hrs), organized supply closet (1 hr), filed customer invoices (1.5 hrs). Total: 4 hours.
3. Payment Records
Keep copies of:
- Checks
- Bank transfer records
- Payment app screenshots
Make sure payments go to an account in your child's name when possible.
Avoid cash payments. They're hard to document.
4. Proof of Reasonable Wages
Save a few job listings or wage data showing market rates for similar positions. This proves you researched what to pay.
How Long to Keep Records
Keep records for at least 4 years from when you file your tax return.
Seven years is even safer.
Red Flags the IRS Looks For
- ❌ No time records showing hours worked
- ❌ Vague job descriptions. "Helper" isn't a real job
- ❌ Cash payments with no paper trail
- ❌ Unreasonable pay ($50/hour for simple filing)
- ❌ Year-end lump sums. Paying $10,000 in December with no prior payments looks suspicious
What Happens in an Audit
If the IRS audits your family employment arrangement, they'll:
- Request documentation (job descriptions, time records, payment records)
- Verify payments went to the child
- Assess whether wages were reasonable
With proper documentation, an audit is straightforward.
Without it, the IRS may:
- Disallow wage deductions
- Assess back taxes plus interest
- Apply accuracy penalties
How Kids Payroll Helps
Kids Payroll was built to solve the documentation problem.
The app provides:
- ✅ Job description templates
- ✅ Built-in time tracking
- ✅ Automatic earnings calculations
- ✅ Payment record tracking
- ✅ One-click audit export with all documentation organized
When your CPA needs records or if the IRS ever asks, everything is ready.
Documentation Checklist
Use this checklist to make sure you're covered:
- ☐ Written job description with specific duties
- ☐ Time records for each pay period
- ☐ Payment records (checks, transfers, app payments)
- ☐ Evidence wages are reasonable (market research)
Frequently Asked Questions
Do I need to issue a W-2 to my child?
Generally yes. Your CPA will prepare a W-2 at year end showing your child's wages.
What if I forgot to keep time records earlier in the year?
Start now. Going forward, keep good records. For past work, create a summary while your memory is fresh. It's not ideal, but better than nothing.
How detailed do time records need to be?
More detail is better. "Filed documents for 2 hours" is good. "Filed 75 customer invoices alphabetically" is better. Specific details prove the work was real.
Disclaimer: This article is for educational purposes only and does not constitute tax or legal advice. Consult a qualified CPA or tax professional for guidance specific to your situation.