Last updated: February 2026
One of the most common questions business owners ask is whether they really need to run formal payroll for their child. After all, it's your kid and your business. Can't you just hand them cash and claim the deduction?
The answer is no. If you want to deduct your child's wages as a business expense and claim the payroll tax exemptions, you need to treat the arrangement like real employment. That means proper payroll processing, documentation, and reporting.
Why Cash Under the Table Doesn't Work
Paying your child in cash without documentation creates several problems.
First, you lose the business deduction. Without payroll records, you can't substantiate the wages on your tax return. The IRS requires documentation to support any business expense deduction.
Second, your child has no verifiable earned income. This matters because earned income is what qualifies them to contribute to a Roth IRA. No payroll records means no provable earned income, which means no Roth contributions.
Third, if the IRS ever questions the arrangement, you have nothing to show them. No time records, no payment trail, no job description. The deduction gets disallowed, and you may owe back taxes plus penalties. Read: What Happens If the IRS Audits Your Kids' Payroll?
What "Running Payroll" Actually Means
For most business owners who hire their children, running payroll doesn't have to be complicated. It comes down to a few basics.
- Track hours and tasks. Keep a record of when your child works and what they do. This can be a time-tracking app, a spreadsheet, or a purpose-built tool like Kids Payroll.
- Pay through a traceable method. Bank transfers are ideal. The point is to have a paper trail showing money moving from your business account to your child.
- Keep a written job description. Document what your child does, their pay rate, and their expected schedule.
- Issue a W-2 at year end. Even if no taxes were withheld, a W-2 documents the wages paid and confirms the employment relationship.
See the full checklist: Kids Payroll Checklist: W-4, I-9, and Everything You Need to File.
It's Simpler Than Traditional Payroll
When people hear "payroll" they think of complex systems with withholding calculations, quarterly filings, and compliance headaches. Hiring your child is much simpler than hiring a regular adult employee.
If your child earns under the standard deduction ($16,100 in 2026) and you're a sole proprietor or single-member LLC owner, there are no FICA taxes to withhold, no FUTA to calculate, and potentially no income tax withholding if the child claims exemption on their W-4. The payroll process is essentially tracking time, making payments, and keeping records.
That's exactly why I built Kids Payroll. When I started paying my daughter Dylan at age six, the available payroll tools were all designed for traditional adult employees. Gusto, QuickBooks, ADP -- they're all built for full-time workers with complex withholding scenarios. I needed a simple way to log Dylan's hours, track her tasks, and keep clean records for tax time. See how we compare: Kids Payroll vs Gusto vs QuickBooks.
What Happens If You Skip Payroll?
If the IRS audits your return and you've claimed a deduction for wages paid to your child but have no payroll documentation, the most likely outcome is the deduction gets disallowed. You'd owe the taxes you would have paid without the deduction, plus interest and potentially penalties.
In more serious cases, the IRS could view undocumented payments to family members as disguised gifts rather than legitimate wages. Gifts aren't deductible, and this reclassification can affect other parts of your return.
The good news is that proper documentation prevents all of this. The IRS isn't opposed to business owners hiring their children. They're opposed to business owners claiming deductions they can't support. Read: What Happens If the IRS Audits Your Kids' Payroll?
How Often Should I Run Payroll?
At minimum, monthly. Some families prefer bi-weekly or even weekly, especially during summer months when children work more hours. The frequency matters less than the consistency. Whatever schedule you set, stick to it and document each pay period.
Frequently Asked Questions
Can I use Venmo or Zelle to pay my child?
It's better to use a business bank transfer so there's a clear separation between personal and business transactions. Venmo and Zelle can blur that line, especially if you also use them for personal payments. A dedicated business checking account transfer is the cleanest option. You'll also need to make sure your child has a bank account set up to receive transfers.
Do I need to file quarterly payroll tax forms?
If no taxes are being withheld (which is common when paying children under the standard deduction through a sole proprietorship), you may not need to file quarterly forms. However, you still need to file annual forms including the W-2. Consult your CPA about your specific filing requirements.
My child only works a few hours a month. Is it still worth it?
Even a few hours per month at a reasonable rate adds up. If your child works 5 hours per month at $12 per hour, that's $720 per year in deductible wages. The documentation burden is minimal with the right tools, and it establishes the employment relationship for years to come.
What if my CPA says I don't need payroll for my child?
Some CPAs take a more relaxed approach and simply deduct the wages without formal payroll. While the deduction may still be allowed, you're taking a risk without proper documentation. The safer approach is always to have records that support your deduction.
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.