At a glance
- What it is
- A separate business owned by the parents that provides real services to your S corp and employs your children.
- What it saves
- The 15.3% Social Security and Medicare tax on wages paid to kids under 18.
- Best fit
- S corp owners with kids working in the business.
- Main catch
- It has to be a real business: a written service agreement, invoices, a fair fee, and separate books.
- Entity type
- A sole proprietorship owned by a parent, or a partnership whose only partners are the child’s parents.
Key takeaways
- A family management company is a parent-owned business that provides real services to your S corp and employs your children.
- It fits S corp owners with kids under 18 working in the business, whose wages would otherwise carry 15.3% Social Security and Medicare tax.
- In the illustrative example, $24,000 of wages to two kids avoids $3,672 of payroll tax when the management company is the employer.
- The catch: it needs a written service agreement, invoices, a fair fee, and separate books, or the IRS can disregard it.
Watch the story
A one-minute story about this strategy. Illustrative story; the people are fictional and are not clients. See all story videos.
The numbers
Picture an S corp owner with two children, ages 14 and 16, who each earn $12,000 a year doing real work for the business: $24,000 of wages in total. The only thing that changes is who employs them.
For illustration purposes. Tax law may change, which may change these calculations slightly.
| Kids paid by the S corp | Kids paid by the management company | |
|---|---|---|
| Kids’ wages | $24,000 | $24,000 |
| Social Security and Medicare (employee + employer, 15.3%) | $3,672 | $0 |
The math: $24,000 × 15.3% = $3,672 of payroll tax that doesn’t apply when a qualifying parent-owned business is the employer. Wages to children under 21 from that kind of business are also exempt from federal unemployment tax.
The income tax side works the same either way: the wages are deductible, and each child’s standard deduction shelters their wages from federal income tax (see Strategy 05).
The management company’s own profit, the fee it collects minus the wages and costs it pays, is self-employment income to the parents. That’s why the fee needs to match the real value of the services, not a number picked to move money around.
Could this strategy work for your business?
In a free tax analysis, your tax strategist checks whether it fits and what it could save, using your real numbers.
How it works
- The parents form a management company. A sole proprietorship (often a single-member LLC) owned by one parent, or a partnership owned only by both parents.
- It signs a service agreement with your S corp. The agreement spells out real services, like marketing, administration, cleaning, or social media, and a fair fee.
- It invoices the S corp, and the S corp pays. The S corp deducts the fee as a business expense.
- The management company employs your kids. It runs its own payroll, keeps timesheets, and issues W-2s. For kids under 18, no Social Security or Medicare is withheld or owed.
Who it fits
- S corp owners with kids working in the business, who would otherwise pay payroll tax on the kids’ wages.
- Families with several children, or kids earning enough that the payroll tax adds up.
- Owners willing to keep a second set of books, bank account, and payroll.
When it doesn’t fit
- Kids’ wages are small enough that the payroll tax saved won’t cover the extra setup and filing costs.
- Children 18 or older, who no longer qualify for the Social Security and Medicare exemption.
- A management company with an owner who isn’t the child’s parent, such as a grandparent or the S corp itself.
The rules
- Who can be the employer. The exemption applies to a child under 18 employed by a parent’s sole proprietorship, or by a partnership in which each partner is a parent of the child.
- Real services, fair fee. The S corp can deduct the fee only for services actually provided, at a reasonable price.
- Real wages for real work. The kids’ pay must be reasonable for what they do, documented with timesheets, and actually paid to them.
- Separate business. Its own bank account, books, service agreement, invoices, payroll filings, and tax reporting.
Risks to weigh
- Sham arrangements. If the management company provides no real services or the fee is out of line, the IRS can disregard it and treat the kids as S corp employees.
- Self-employment tax on the margin. Profit left in the management company is subject to self-employment tax for the parents.
- More paperwork. A second business means another return, another payroll, and Oklahoma filings that need to stay current.
How we handle it for clients
With a Cannon & Brown tax plan, we run the numbers first to see whether the savings justify a second entity, then help set up the service agreement, fee, and kids’ payroll, and keep both businesses’ records and returns in step all year. Because our technology keeps your numbers current all year, we can test this strategy against your real numbers and adjust it as your business changes.
Illustrative example. The family and figures on this page are hypothetical, used to explain how the strategy works. They are not a client and not a promise of results. The example assumes two children under 18 earning $12,000 each, employed by a sole proprietorship or parents-only partnership. This page is educational and is not tax advice for your situation; tax rules and limits change.
Brooks leads Cannon & Brown Tax Advisors, a forward-thinking tax firm serving business owners in Oklahoma and beyond. He builds year-round tax strategies that help business owners keep more of what they earn and reach their goals. More about Brooks
Common questions about the family management company
Why doesn’t my S corp get the payroll tax exemption for my kids?
The exemption applies only when a child under 18 is employed by a parent’s sole proprietorship or a partnership whose only partners are the child’s parents. Wages an S corp pays your children carry full Social Security and Medicare tax.
Can a single-member LLC be a family management company?
Yes. A sole proprietorship owned by one parent, often a single-member LLC, can qualify, as can a partnership owned only by both parents.
Can grandparents own the management company?
No. If an owner isn’t the child’s parent, such as a grandparent or the S corp itself, the exemption doesn’t apply.
Is the management company’s profit taxed?
Yes. The fee it collects minus the wages and costs it pays is self-employment income to the parents, which is why the fee should match the real value of the services.
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