Business Advisory Services
Everything you need to help you launch your new business entity from business entity selection to multiple-entity business structures.
[breadcrumb]
Posted Saturday, September 19, 2026
Table Of Contents
Family Payroll Quick Build Strategy Session
Two different strategies get lumped together under one heading, and they work for completely different reasons. Putting your kids on payroll shifts income to a lower bracket. Putting your spouse on payroll changes what is deductible and adds a second retirement plan. We cover both, in that order.
On the children side, the version you have probably read goes like this. Pay each child up to the standard deduction, they owe no federal income tax, you get a full deduction, and nobody pays Social Security or Medicare on any of it. Most of that is true. The last part depends entirely on your entity, and the articles making the rounds were written for sole proprietors. Run an S Corp and that exemption is gone, unless the children are paid by a different entity, which is the Family Management LLC we cover below.
On the spouse side, the payroll tax angle is mostly a wash and almost nobody leads with the part that matters. Business meals, tag-along travel and a second 401k deferral are where the money is, and the retirement piece alone can run tens of thousands a year.
There is also a question nobody asks out loud, which is whether any of it clears its own costs. Payroll processing runs about $800 a year. For one college-age child at a middling bracket, the whole arrangement can net a few hundred dollars. We would rather show you that table than sell you a strategy.
Session Fee
$475
One session included
$475
One session included
Sessions
1
75 minutes
1
75 minutes
Deliverable
1
Written recap
1
Written recap
Session Checklists
This session produces a plan you can hand to a payroll provider, so we want the family details in advance.
Pre-Session Checklist, Due 48 Hours Prior
- Last two years of complete tax returns, federal and state
- Current year income estimate, which can be a paystub, a profit and loss, or a number
- The WCG Family Payroll worksheet (or you can answer the questions below in an email)
What the Worksheet Asks For
What the Worksheet Asks For- Ages of your children and what work each could realistically perform
- Entity type and ownership for each business and each rental activity
- Whether payroll already exists, through which provider, and what it costs annually
- Your spouse’s current role, duties, and hours, and whether they are an owner, an employee, both or neither
- Your spouse’s outside W-2 wages, if any
- The operating spouse’s current salary (unless we are already doing payroll planning for your business)
- Existing retirement accounts and plan documents for each family member
What We Cover in the Session, Kids
- Which entity can pay your children and what that does to payroll tax
- Whether the arrangement clears its own costs at your marginal tax bracket
- What work actually supports the wages, and whether the pay is reasonable for the hours and duties
- The Roth IRA opportunity and how to fund it
- Roth IRA versus Trump Account funding for children
- Whether a Family Management LLC makes sense, and the risk that comes with it
- The rental property analysis, if you own rentals
- Dependency, support, education credits and Section 127 when you have a college-age child
- Documentation, state labor law, and the setup sequence
What We Cover in the Session, Spouse
- Whether your operating salary is above the Social Security wage base, and what that means for splitting
- The Social Security arbitrage, if your spouse has outside wages
- The retirement funding case, which is usually the largest number on the table
- What putting your spouse on payroll can change for travel and meals tax deduction
- Health insurance and dependent care considerations
Three Ways to Put Your Family on Payroll
Here is the shape of it before we get into any one piece. The children figures assume a 24% marginal rate.
| Strategy | What It Costs | What It Can Move |
| Adding spouse to payroll | Increased unemployment and other state payroll taxes, $350 to $600 | Nothing directly, where the work shifted carries equal value. The money is in deductions, tag-along travel and a second 401k deferral |
| Adding children to S Corp payroll | $800 payroll processing, plus Social Security and Medicare at 15.3% | $16,100 per child at your rate less 15.3%. At 24% that is an 8.7 point spread, about $1,401, or $601 after processing |
| Children through a Family Management LLC | About $1,100, being $800 payroll processing plus $300 of additional Schedule C and payroll tax preparation | $16,100 per child at your full rate with no payroll tax. At 24% that is about $3,864, or $2,764 after costs |
What It Costs to Give a Child Money
Start here, because it explains why hiring your children is a strategy at all.
To hand your child $16,100 for college or savings, you need roughly $21,200 of income at a 24% marginal rate, or about $24,800 at 35%. Those are federal income tax alone. Add Medicare and state income tax and the all-in figure runs closer to $28,000 in Colorado and past $30,000 in California. You are earning close to double what your child receives.
Here is the same idea in a form you feel every month. You already spend a lot of money on your children and that is expected (and even demanded at times). To spend $5,000 on club sports you need to earn something like $7,500 first. But your child’s salary, if it stays under the standard deduction ($16,100 for the 2026 tax year), is tax-free to them. To spend that same $5,000 out of their wages takes $5,000 of earnings, not $7,500.
That gap is what employing them is trying to close. As the saying goes, your children are going to take your money anyway. You may as well make it tax-advantaged. And since chores are apparently a snap, why not have them work too. Yes, heavy on the sarcasm.
Which Entity Pays Your Children Changes Everything
This is the piece that can confuse.
A child under 18 generally avoids Social Security and Medicare when working for a parent-owned sole proprietorship or a single member LLC owned directly by the parent, under IRC Section 3121(b)(3)(A). A partnership can also qualify, provided every partner is a parent of the child. Federal unemployment stays exempt until 21 under IRC Section 3306(c)(5). The code also covers domestic service, and separately exempts a child under 18 delivering newspapers. Newspaper delivery? By hand? Um, Ok?! IRS Publication 15, the Circular E, carries the same chart if you want to see it from the source.
Our preference is the parent-owned single member LLC. A single member LLC is normally treated as a corporation for payroll tax purposes, which would undo the exemption, but the regulations carve out this exact situation and treat the parent as the employer (Treasury Regulations 31.3121(b)(3)-1(d) and 31.3306(c)(5)-1(d)). A partnership works and might carry a different audit profile, but a separate Form 1065 and the added preparation cost usually make it an expensive way to reach the same place.
And note what these rules are. They are federal payroll tax rules. State unemployment, disability and other state payroll programs still have to be checked on their own.
Elect S corporation status and that all blows up, because in the eyes of the IRS your child is now working for a corporation rather than for you, the parent. The underlying LLC does not save you here. The tax election is what controls, and that election is corporate. Social Security and Medicare apply at 15.3%, at any age. Yuck, and it severely impedes the efficacy at a 22% marginal tax bracket.
| Who Pays the Child | Is That You? |
| Sole proprietorship | Yes |
| Single member LLC you own directly | Yes |
| Partnership where every partner is a parent | Yes |
| S corporation, including an LLC that elected it | No |
| C corporation | No |
If you read an article that said otherwise, it was written for sole proprietors.
What About the Family Management LLC?
You have probably seen this one promoted, or at least overheard at your local watering hole.
The arrangement: your S Corp pays a management fee to a separate garden-variety LLC reported on Schedule C, and that LLC processes payroll for your children. Because the payer is not a corporation, the Social Security and Medicare exemption survives.
One assumption that has to hold. The management LLC is owned by you personally, not by your S Corp. If the S Corp owns the disregarded LLC, you lose both the parent-child employment premise and the business-to-business relationship you are trying to establish. We would not structure it the other way, and it is worth saying out loud before somebody tries to improve on it. Seems obvious, Yes, but here we are just the same.
What it costs to run. Roughly $800 a year in payroll processing plus about $300 of additional Schedule C tax preparation. Call it $1,100 annually. You need to move enough wages to clear that and then some before the administrative effort is worth it. The arrangement can support wages up to $16,100 per child (for the 2026 tax year) without federal income tax at the child level, assuming the work performed supports the number. There is no mysterious ceiling below that, only reasonable compensation and hours actually worked.
Now the part most promoters skip. The Management Fee relationship is a label. It needs purpose, and this is where these arrangements live or die, and it gets glossed over constantly.
A management fee has to buy something identifiable. The service the management company bills should line up with the work your children are doing. If the invoice says one thing and the labor is another, the whole arrangement reads as paper.
Candidates, and none of them is free of strain.
- Marketing and content. Social media, photography, video or graphic work your children genuinely produce.
- Administrative and records management. Filing, scanning, data entry, mailing and document retention.
- Facilities and janitorial. Cleaning and upkeep on the spaces the business actually uses.
- Equipment and vehicle upkeep. Washing, servicing and tracking maintenance so things keep running.
- Customer follow-up. Appointment reminders and confirmation calls.
Licking stamps? Maybe.
IT consultation and similar nebulous services are the weakest of the usual suggestions, and we generally steer away from them unless your child genuinely has the skill and your business genuinely has the need.
Here is the test. Would you hire an unrelated company to do this work at this price? If the answer is no, the fee is not buying anything and the structure is exposed no matter how the invoice is worded. In other words, what is the replacement cost and practicality of the labor your children are supplying?
That test is not something we invented over a business lunch. IRC Section 482 gives the IRS broad authority to reallocate income and deductions between businesses under common control when the pricing does not reflect an arm’s length result, and the controlled services rules at Treasury Regulation 1.482-9 are built around exactly that question.
Whether your facts support this, and what the management company should actually be billing for, is one of the harder calls in the Family Payroll Quick Build. It is also the one where getting a second opinion is worth more than the session costs.
Paying Your Children From Rental Property Is a Different Problem
Do not lift the operating business answer and apply it to rentals. The mechanics are genuinely different.
Start with why. Net rental income is not subject to Social Security and Medicare unless you are running a hotel or providing substantial personal services. So running payroll through an S Corp to reach your children can manufacture payroll tax that did not exist before, which is the opposite of the goal.
The way around it is to keep the management company a garden-variety LLC rather than electing S Corp status on it. Then the family employment exception survives and children under 18 stay outside Social Security and Medicare. That single choice is the difference between this working and not.
There are three routes, in descending order of elegance.
Route One: A Property Management Company
The most elegant option, because it scales across properties and it opens 401k funding for you and your children.
Your rentals pay a management fee that is usual and customary, roughly 5% to 10% for long-term and 20% to 40% for short-term. The management company can bill direct services too, such as advertising, cleaning and maintenance. Then real payroll runs from there with paystubs and W-2s. One child or a gaggle, the processing is the same.
Two problems. Depending on your state, property management can be a regulated activity requiring licensing or registration. If that is a problem, limit the management company to genuinely non-regulated services such as cleaning, maintenance, administrative support or other permitted work. Do not simply rename regulated property management activity on the invoice, because the label does not change the activity.
And a large management fee can create or enlarge a passive rental loss that gets suspended. Be careful about how that works. The wages to your children do not reduce the rental loss, because the wages sit in the management company and the loss sits in the rental. What they do is offset the economic pain, since the management company uses the fee to fund deductible wages rather than keeping the whole fee as taxable income.
Suspended does not mean lost. Passive losses carry forward under IRC Section 469(b) and get released when you have passive income to absorb them, or all at once when you sell the property in a fully taxable disposition under IRC Section 469(g). So this is a timing question rather than a vanishing deduction. Timing still counts, though, because eventually can mean a decade or more.
So the rental deduction can be trapped while the management company separately reports income and pays wages. Model both sides before setting the fee. And if Johnny or Suzie is being paid to paint, the irony writes itself.
Route Two: Run Them Through an Existing S Corp
If you already have an S Corp with payroll running, your rentals can pay it a consulting or service fee and your children go on that payroll.
The cost is Social Security and Medicare at 15.3% regardless of age, so the marginal rate test applies. Use the same 24% screen. At 22% it can still pencil, but rarely by enough to be worth the effort and the risk.
Route Three: Call Them Contractors and Issue a 1099
Problematic on two fronts, and we generally steer away from it.
First, a contractor typically has to hold themselves out to the public in that line of work. Colorado, our home state, presumes every service performed is employment unless you prove the person is free from control and customarily engaged in an independent trade. Most states read similarly. If your child genuinely mows other lawns besides yours, the argument improves.
Second, it converts income that escaped self-employment tax into income that does not. Changing the color of the money in the wrong direction.
Where the Payroll Account Lives
Payroll accounts tie to an EIN, so one rental, one LLC, one EIN does not scale. Lending a child from one rental to another is employee leasing and gets messy fast. A management company or a company that provides maintenance and support services solves this cleanly.
State payroll is where the pain lives. Texas is a piece of cake. Ohio is a nightmare of local city and school district taxes. Look at your own paystub as a barometer of what you are signing up for.
Section 127 Education Assistance for a College-Age Child
A business can provide up to $5,250 (for the 2026 tax year) of qualifying education assistance to an employee under a written Section 127 plan. The limitation that matters for a closely held family business is plan-wide: no more than 5% of the plan’s total benefits can go to greater-than-5% owners or their spouses and dependents.
The clean fact pattern is an adult child who is a bona fide employee and not treated as owning more than 5%. Watch the attribution, because a child under 21 is deemed to own your stock. Dependency is not an absolute bar, though. A dependent of a greater-than-5% owner simply falls into the restricted class for that plan-wide 5% test.
In an owner-only or family-only business that usually makes Section 127 impractical. With a larger workforce, run the actual plan-wide 5% test rather than assuming either way.
How Old Does My Child Have to Be to Work for My Business?
Child labor rules vary dramatically by state and they change. Federal law has a parental exemption at 29 U.S.C. Section 213(c)(1) and 29 C.F.R. Section 570.126 for children working in a business their parents own, but state law can be more restrictive and the permitted duties shift with age.
Do not confuse these with the payroll tax rules above, because they are different tests and they routinely give different answers on the same child. The Department of Labor treats a youth as employed by a parent where a parent is the sole owner, where the parents are the only partners in a partnership, or where the parents are the only stockholders in a corporation, per its Field Operations Handbook at Chapter 33. The FICA exemption (fancy talk for Social Security and Medicare) is not nearly that generous. Elect S corporation status and the child labor exception can still apply while the Social Security and Medicare exemption is gone. Same child, same business, different statute. Neither exception reaches work the Secretary of Labor has declared hazardous, at any age.
And the tax cases run younger than our floor. Eller allowed wages paid to a seven year old, and Denman looked at children roughly seven through eleven. Those cases answer whether the deduction survives, not whether the child may lawfully do the work.
So there are three questions stacked here rather than one:
- Can the child legally work under federal and state labor law?
- Do the wages escape Social Security and Medicare?
- Is the deduction defensible?
A young child can pass one and fail another.
Our own guidance is age 12 as the floor. We do not process payroll, so this is a recommendation rather than a rule we enforce. Younger children can work in narrow fact patterns and we treat those as exceptions rather than the starting point. We have a client with twin nine year old daughters who do quite well recording TikTok videos, and we continue to be amazed at how people make money.
If your children are younger than 12 or the work is unusual, bring it to the Family Payroll Quick Build before you run payroll rather than after.
Part II: Should You Put Your Spouse on Payroll?
Ok, 5,000 words later here we are with the spouse on payroll question.
There are two separate questions here and they get merged constantly, or continually as an English teacher might correct.
- Should your spouse own stock? An inactive spouse can hold stock and take the distributions attributable to that ownership without performing any services.
- Does your spouse perform services that justify payroll? A spouse who genuinely works in the business can be both a shareholder and an employee.
What your spouse does drives the answer. More importantly, what your spouse “thinks” might drive the answer. Kidding aside, here is what each choice buys.
Adding a Spouse Does Not Double the Salary
Think of the value of the work as a pie. Susan was previously doing $110,000 worth of work for her S Corp. Her husband Mark comes along and takes over some of it, bookkeeping and licking stamps. Susan hates licking stamps, and stamp licking is high-end work, whether your children are doing it, or The Amazing Mark.
Mark takes over $40,000 worth of those duties, leaving Susan with $70,000. The household still provides $110,000 of services to the company. At that level Social Security and Medicare come out identical either way. Nothing gained, nothing lost. This assumes Mark does not have another W-2 job (we talk more about this below).
That holds only because the work moved. Mark took over tasks Susan was already doing, so the total value of services to the business did not change. If Mark is adding work that Susan was not doing, total officer compensation should go up rather than get sliced thinner, and the payroll tax goes up with it.
Check the Social Security Wage Base First
Here is where splitting actively hurts, and it is the first thing we look at.
Say Susan is paid $220,000, which is above the Social Security wage base of $184,500 (for the 2026 tax year). Move $20,000 to Mark and Susan drops to $200,000, still above the base, so she saves nothing at all. Meanwhile Mark’s $20,000 is entirely new Social Security wages at 12.4% combined. That is $2,480 of tax that did not exist before you got clever.
So the rule is simple. Splitting is roughly neutral when the operating spouse is below the wage base, and it is expensive when they are above it.
The Costs Nobody Mentions When You Add a Spouse
Unemployment is determined per employee, so adding a spouse adds $350 to $600 a year depending on your state. Your own unemployment tax is unavoidable either way, so this is purely additional.
State programs pile on top, and they are not all called the same thing. California has state disability insurance with no wage ceiling at all now, so it applies to every dollar of your spouse’s wages. Colorado has FAMLI for paid family and medical leave. Other states have their own versions, plus employment training taxes, workforce assessments and similar line items. Several of these also turn on whether your spouse is an owner or just an employee, so the answer is not uniform even within one state. We check your state rather than assuming, and occasionally that works in your favor.
And if your spouse already works elsewhere, the family business still gets its own unemployment wage base for that employee. FUTA and state unemployment can be paid again by your business even though another employer already paid unemployment tax on the same person.
Social Security Arbitrage When Your Spouse Works Elsewhere
This is the best move on the spouse side and it only works in one specific fact pattern.
Susan is paid $120,000 by her S Corp. Mark earns $200,000 somewhere else. Reduce Susan to $80,000 and add Mark at $40,000, assuming the services Mark provides are genuinely worth that and Susan is handing off the corresponding work.
Through the year, Mark has $40,000 of wages taxed for Social Security by the S Corp, and Susan has $40,000 less. Because Mark has already cleared the $184,500 wage base (for the 2026 tax year) at his other job, every dollar of that $40,000 is excess employee Social Security, refunded on their individual tax return on Schedule 3. We essentially took the Social Security tax Susan was going to pay, made Mark pay it, and Mark gets it refunded.
$40,000 at 6.2% is $2,480. Which half matters here. Only the employee gets the refund. The employer never does, so the S Corp pays its 6.2% either way. The savings is the employee half. The employer half is a sunk cost, since it was going to be paid either way, whether Susan is at $120,000 or Susan is at $80,000 plus Mark at $40,000.
And yes, Mark has to actually do work and be valuable. A stretch, we know.
The Second 401k Deferral Is Usually the Real Reason
This is where adding a working spouse earns its keep, and it deodorizes a lot of the problems with spousal payroll.
Solo 401k funding has independent sources. Your deferral, your spouse’s deferral, and the business contribution of up to 25% of W-2 compensation. Deferrals are deferrals and contributions are contributions.
| Susan Alone | Susan and Mark | |
| Salary | $110,000 | $70,000 and $40,000 |
| Deferrals, age 50 to 59 or 64 and over | $32,500 | $32,500 each, $65,000 |
| Deferrals, age 60 to 63 | up to $35,750 | up to $35,750 each, $71,500 |
| Business contribution at 25% | $27,500 | $27,500 |
| Total into the plan* | $60,000 | $92,500 |
* Totals assume the standard catch-up. In the 60 to 63 window those become $63,250 and $99,000
That is $32,500 of additional retirement funding (for the 2026 tax year) for roughly $300 to $500 of additional payroll tax. Mark deferring $32,500 at a 32% marginal rate moves over $10,000 of tax, and it cost a few hundred dollars of payroll tax to get there. If either of you turns 60, 61, 62 or 63 during the year, the catch-up rises from $8,000 to $11,250 under IRC Section 414(v)(2)(E), which takes the ceiling to $35,750 each. It replaces the $8,000 rather than stacking on it, and the plan document has to offer it.
Whether your numbers work like that depends on your salary, your spouse’s outside wages, your ages and your plan document. Four variables, and getting any of them wrong changes the answer. That is the Family Payroll Quick Build.
For contrast, matching that contribution through a SEP IRA would take roughly four times the salary, and the payroll cost would wipe out the benefit for years. Yuck. No one does SEP IRAs anymore.
One assumption to check first. This works only if your spouse has not already used their elective deferral at another employer. The IRC Section 402(g) limit follows the individual across their 401(k), 403(b) and other plans sharing that limit, so a spouse who maxed a 401k at their day job does not get a second $24,500 here. Governmental 457(b) plans are the notable exception, with their own separate limit under IRC Section 457(e)(15).
And a mechanical note. A one-participant 401k generally covers both spouses, despite the name. Once another employee becomes eligible for the plan, the solo plan rules and the ordinary coverage requirements have to be revisited. Eligibility is the trigger, not merely hiring someone.
One more limit if you are 50 or older. Where your prior year W-2 wages from this business were above $150,000, which is the threshold applied for the 2026 tax year, your $8,000 catch-up has to be Roth, so it stops being a deduction. That usually shows up on a salary set high enough to support a cash balance plan. A spouse arriving from an outside job is not caught in the first year, since the test looks at prior year wages from this employer. And if your plan document has no Roth feature, an affected participant cannot make a catch-up contribution at all.
What a Spouse on Payroll Makes Deductible
Once your spouse is a legitimate employee, revisit spending the household is already doing and ask whether some of it has a genuine business purpose that was previously missing or undocumented.
The business purpose comes first, though. A dinner does not become deductible because somebody said QuickBooks over dessert. A bona fide business meeting can be a deductible business meal even though dinner happened to be served alongside it. Same idea, opposite starting point.
Travel works the same way, and the three conditions in IRC Section 274(m)(3) are easy to hold onto:
- Your spouse is an employee,
- your spouse has a bona fide business reason to be on the trip (of course they do), and
- the travel would otherwise qualify as a business expense.
Meet all three and their travel can be deductible. Fiji is probably not a conference.
The courts are not impressed by tag-along duties. In Meridian Wood Products Co. v. United States, 725 F.2d 1183 (9th Cir. 1984), the wife socialized with the other spouses, shopped and went sightseeing during the business sessions, and the court concluded her function was to be a socially gracious wife, not a professional woman, borrowing the phrase from United States v. Weatherford. The language is wonderfully 1984. The rule survived the haircut. Compare United States v. Disney, 413 F.2d 783 (9th Cir. 1969), where the spouse did enough real work to carry the deduction, and IRS Publication 463, Travel, Gift and Car Expenses, which walks through an example where occasional typing and joining client lunches was not enough.
On the break-even, be careful about what you are counting. We want roughly $2,000 of additional deductible expense, not $2,000 of gross spending. Ordinary business meals are generally 50% deductible, so $2,600 of meals produces about $1,300 of deduction. Qualifying business travel generally moves dollar for dollar. Run the actual tax benefit against the incremental payroll cost.
Thumb through the family spending, but look for business purpose that is genuinely there, not one you can invent after the Visa statement arrives.
Sure, we leave room for adding your spouse just to keep the peace at home, but your spouse has to work.
One note on health insurance, which gets overstated almost everywhere. A working spouse does not necessarily need actual stock to receive greater-than-2% shareholder treatment. IRS Notice 2008-1, the very first one in 2008, says a 2% shareholder includes anyone treated as owning stock under IRC Section 318, and Section 318(a)(1) attributes one spouse’s stock to the other. Do not transfer stock solely to chase the health insurance deduction without checking the attribution rules first.
And the dependent care credit. If your household already has qualifying dependent care expenses and the only thing blocking the credit is that one spouse has no earned income, putting that spouse on legitimate payroll solves the earned income problem.
What if My Spouse Owns Stock but Does Not Work?
An inactive spouse can legitimately own S corporation stock and receive the shareholder distributions attributable to that ownership. What it does not do is reduce the reasonable value of the working spouse’s services, so inactive ownership is not a payroll tax strategy on its own. Nobody should be multiplying a reasonable salary by an ownership percentage.
It is simply a separate ownership decision with its own consequences. An inactive owner cannot be paid a salary, which means no retirement plan participation for that spouse and no help on the meals and travel side. Shareholders cannot be reimbursed for meals and travel expenses they incur on behalf of the business. They must be employees.
If your spouse later starts performing real services, as opposed to fake services, that is the moment to revisit whether payroll, retirement plan participation and business expense opportunities belong in the picture. That is the payroll question, and it is the one this session is about.
A Variation for High-Income Couples in the Same Field
A variation worth knowing if you and your spouse work in the same field and earn well.
A married couple in IT earning $600,000 combined. The S Corp has one shareholder, and the other spouse has historically been the family’s favorite “volunteer.” Technically that spouse becomes a non-shareholder employee once we start paying for the real work they perform.
Paying $120,000 each subjects all $240,000 to Social Security. Paying the shareholder $200,000 and the other spouse $40,000 leaves $224,500 subject to Social Security, because the shareholder’s Social Security wages stop at $184,500. Medicare still applies to the full $240,000 either way.
That is $15,500 of wages escaping Social Security, or roughly $1,900 of combined tax savings.
Salaries still have to be commensurate with the work performed, and a smaller salary for one spouse has a Social Security benefit consequence worth weighing.
One caution if you are in a licensed practice. Law, medicine and accounting restrict non-professional ownership in most states, and the rules vary. In Colorado a non-CPA can own part of a CPA firm as long as CPAs hold 51%, with supervisory and control rules on top. Check with your regulatory agency before anyone signs anything.
What About Putting Mom and Dad on Payroll?
Same concepts, different generation, and it comes up more than you would think.
Say you support Mom with $10,000 a year and you sit in the 32% bracket. Earning enough after tax to hand her that $10,000 can take roughly $14,700 of your own pre-tax income. Same concept as giving your child $10,000.
Now look at Mom’s actual tax return rather than assuming a bracket. If she has little other taxable income, some or all of her pro rata S corporation income may be absorbed by her standard deduction before she reaches any bracket at all. Even if she is already sitting in the 12% bracket, the family rate spread is substantial.
And check her age, because the number she can absorb is bigger than the $16,100 you keep hearing about. A single parent 65 or older gets the $16,100 standard deduction plus a $2,050 additional amount plus the $6,000 senior deduction, all for the 2026 tax year, so roughly $24,150 of income can land before she reaches a bracket at all. For a married couple both 65 or older it is about $47,500. The senior deduction starts phasing out above $75,000 of modified AGI for single filers and $150,000 for joint filers, and it is scheduled to run through 2028, so confirm it rather than assuming it.
So make her a bona fide shareholder and choose an ownership percentage prospectively that puts her pro rata share of income and distributions in the neighborhood of the support you were already planning to provide. We choose ownership. We do not choose a K-1 number at year end, because the K-1 follows the shares.
Since the ownership is real, and not just some paper move, so are the gift, basis, estate and succession consequences, which means the estate plan should provide for the shares returning to the family at death. And run Mom’s actual marginal cost before recommending it, since her other income and income-sensitive items still matter.
One thing that does not carry over. The payroll tax exception for children does not reverse generations. A parent working in your sole proprietorship still owes Social Security and Medicare on the wages, though FUTA is exempt. Inside a corporation the normal federal payroll taxes apply. So paying Mom for real work is a reasonable compensation exercise rather than a payroll tax play, and the ownership route above is the part that moves the rate.
A parent who does not work is simply an investor, so no salary is required. A parent who does work may produce better arbitrage than a child, since their marginal rate could be dramatically lower than yours. Good luck with the hey Mom, want a job conversation. What goes around comes around.
What the File Has to Show
Family members on payroll get scrutinized more than anyone else, and the two halves of this get tested differently. For children the question is whether the work happened, so the file needs job descriptions, pay rates and time records. For a spouse the work usually did happen. The question is whether the number attached to it is right.
So when you split $110,000 into $70,000 and $40,000, the file should show which duties moved and why the split reflects them. Not a memo written the following April. A contemporaneous record of what each person does, what that work is worth, and when the handoff happened. Same standard as your own salary, because it is the same question.
Memories fade, so document it today.
Building that documentation package, and deciding who should be paid from which entity, is what you walk out of the Family Payroll Quick Build with.
Chat With a Tax Pro
Taxes can be tricky. Chat with a WCG human now and get questions answered.
Table Of Contents
Tax Planning Season
Tax planning season is here! Let's schedule a time to review tax reduction strategies and generate a mock tax return.
Bookkeeping Services
Tired of maintaining your own books? Seems like a chore to offload?