Short answer…
Not unless they earned it.
Long answer…
A recent Tax Court case agreed with the IRS, who claimed that a business, Embroidery Express, LLC, cannot deduct the bonuses paid to the children of the business’s owners. It is important to note that the children did actually work at the business, helping out with inventory, office and equipment cleaning, and lawn care services. For this work, the children were paid a regular wage, and the IRS did not have any problem with the business deducting these payments to the children. However, the children also received year-end bonuses (which constituted a majority of their annual wages) that were based on the company’s profits. The IRS stepped in and said “I don’t think so, these bonuses are totally unreasonable and you are clearly just using your business to support your children, so you can’t deduct this”.
It is worth noting that the Tax Court did allow the deduction for the other (non-bonus) wages paid to the children throughout the year, as they were considered to be fair compensation (when compared to similar work between unrelated parties) for the services performed.
Conclusion…
If your children work at your business, they’re entitled to be paid and your business is entitled to deduct their wages just like you would for anyone else, but if you try to pay them a bonus they didn’t earn in the hopes of getting a tax deduction, the IRS might not agree, and at least in this case, the Tax Court concurred.