September 2026
Hiring your child can be a legitimate tax strategy. Here’s what you need to know.
Putting your kids on the payroll sounds like the kind of thing that raises red flags with the IRS. In reality, it’s one of the more overlooked, fully legitimate tax strategies available to business owners, and the rules around it are more straightforward than most people expect.
Here’s how it works, where the real savings come from, and the one entity type where the rules change in an important way.
The IRS allows business owners to employ their own children, provided the work is real and the pay is reasonable for what they’re doing.
There’s no special loophole here. It’s the same standard that applies to hiring anyone else: the work has to be actual and necessary for the business, and the wage has to reflect what you’d pay a non-family employee for the same job.
The tax advantage comes from where that money ends up. Wages paid to your child shift income out of your tax bracket and into theirs, which is usually far lower or nonexistent. The business still deducts the wages as a normal business expense, so the family unit as a whole often ends up paying less in total tax on the same dollars, simply by moving where those dollars are taxed.
This is where the strategy gets interesting, because your business structure changes what you’re eligible for.
Sole proprietorships and single-member LLCs taxed as sole proprietorships get the best treatment. If your child is under 18, their wages are exempt from Social Security and Medicare taxes (FICA), and if they’re under 21, the wages are also exempt from federal unemployment tax (FUTA). That’s a meaningful payroll tax savings on top of the income-shifting benefit.
Partnerships get this same FICA and FUTA exemption, but only if both partners are the child’s parents. If there’s a non-parent partner involved, the exemption goes away.
S-corporations and C-corporations are where the rules change. Because the business is a separate legal entity from you as the owner, wages paid to your child through an S-corp or C-corp don’t qualify for the FICA and FUTA exemptions, regardless of the child’s age. You still get the income-shifting benefit and the business deduction, just without the payroll tax break that sole proprietors and qualifying partnerships get.
If you’re structured as an S-corp and this is a significant part of your planning, it’s worth talking through the numbers with your CPA before assuming the strategy works the same way it would for a sole proprietor.
Here’s where the real savings show up. Your child can earn up to the standard deduction amount for a single filer in wages each year without owing any federal income tax on that income at all, since the standard deduction wipes out the tax liability on earned income up to that threshold.
That figure adjusts annually, so check the current-year amount rather than relying on a number from a prior tax year.
Above that threshold, the income is taxed at your child’s rate, which for a dependent with modest income is still typically far lower than yours. Either way, the wages come off your business’s taxable income as a normal deduction, so there’s a benefit at every level, not just below the tax-free threshold.
This is the part people skip, and it’s exactly the part that matters most if you’re ever asked to explain the arrangement.
Track actual hours worked, the same way you would for any employee. A simple timesheet is enough, but it needs to exist.
Pay a reasonable wage for the work being done. Filing paperwork, helping with social media, cleaning the shop, or doing basic data entry are all legitimate roles, but the pay needs to match what you’d offer someone else doing that same job.
Run it through payroll properly, with a W-2 issued at year end, not cash paid informally under the table.
Keep a written job description on file, even a brief one, describing what your child actually does.
Age matters for the type of work. Younger children can handle simple administrative tasks; more demanding roles should scale with age and ability.
Skipping any of this doesn’t necessarily mean you can’t take the deduction, but it does mean you have very little to point to if the wages are ever questioned. Good records are what separate a legitimate family payroll arrangement from one that looks like income shifting for its own sake.
Say you run a sole proprietorship and hire your 16-year-old to handle social media posting and basic bookkeeping data entry, five hours a week. At a reasonable rate for that work, that might come out to roughly $9,000 for the year.
That $9,000 is a deductible business expense, reducing your taxable business income by that amount. Because your child is under 18 and you’re a sole proprietor, the wages are exempt from FICA and FUTA taxes entirely.
And because the amount falls under the standard deduction threshold, your child likely owes no federal income tax on it either. The same $9,000 that would have been taxed at your rate, plus payroll taxes, moves to your child essentially tax-free on both ends.
That’s the strategy in a single example: real work, reasonable pay, proper documentation, and a meaningful shift in where the tax burden lands.
Once your child has legitimate earned income from working in your business, that compensation can make them eligible to contribute to a Roth IRA.
How a Custodial Roth IRA Works
Because a minor generally can’t establish and control an investment account independently, the account is typically opened as a custodial Roth IRA, with an adult serving as custodian.
Control of the account eventually passes to the child according to applicable state law and the financial institution’s custodial-account rules.
How Much Your Child Can Contribute
For 2026, the maximum contribution to traditional and Roth IRAs combined is $7,500 for someone under age 50.
However, the contribution also can’t exceed the child’s eligible compensation for the year.
For example, if your 16-year-old legitimately earns $9,000 in W-2 wages during 2026, they could generally contribute up to the full $7,500 annual limit.
The Contribution Doesn’t Have to Come From Their Paycheck
The cash used to make the contribution doesn’t have to be the exact dollars your child received in their paycheck.
A parent or grandparent can provide money for the contribution, provided the total IRA contribution doesn’t exceed the child’s eligible compensation or the annual IRA limit.
This can allow the child to save for retirement while still keeping some or all of their wages available for other purposes.
Why Starting Young Matters
The long-term advantage is time.
Money contributed to a custodial Roth IRA may have decades to compound before retirement. That gives even relatively modest early contributions the potential to grow substantially over time.
Qualified Roth IRA distributions are tax-free, which makes those early years of compounding especially valuable.
This is a strategy we walk family business owners through often, and the details matter more than most people expect going in.
Entity structure alone can change whether you get the full payroll tax benefit or just the income-shifting piece, and getting the wage amount and documentation right up front is what protects the deduction if it’s ever reviewed.
Because we work with small businesses and family-owned operations throughout the Baxter, Pequot Lakes, and Aitkin area, we’ve set up payroll for kids working in everything from retail shops to construction businesses to professional offices.
We can look at your specific entity structure and make sure the payroll and record keeping side is set up correctly from day one, not patched together after the fact.
If you’re considering putting your child to work in your business, let’s make sure it’s structured the right way from the start.
Book a family payroll planning consultation with our team and we’ll walk through what makes sense for your specific situation.
What age can I start paying my child through my business?
There’s no set minimum age under federal tax law, but the work has to be real and age-appropriate. A young child might handle simple tasks like shredding documents or basic filing, while more demanding work should scale up as they get older.
Do I still need to withhold payroll taxes if my child is under 18?
If you’re a sole proprietor or a partnership where both partners are the child’s parents, no. Wages to a child under 18 are exempt from Social Security and Medicare taxes in that structure. That exemption doesn’t apply if your business is an S-corp or C-corp.
Can I hire my child if my business is an S-corp?
Yes, you can still employ your child and deduct the wages, and the income-shifting benefit still applies. What you lose is the FICA and FUTA exemption available to sole proprietors, since the S-corp is a separate legal entity from you as the owner.
Is there a limit to how much I can pay my child?
The wage has to be reasonable for the actual work performed, the same standard that applies to any employee. There’s no fixed dollar cap, but the amount needs to be defensible against what you’d pay a non-family member doing the same job.
Does my child need to file their own tax return?
It depends on how much they earn and whether it’s above the filing threshold for the year. Many kids earning under the standard deduction amount owe no federal income tax, but a return may still be worth filing to recover any withholding or start building a work history.
Can I do this for a grandchild, niece, or nephew instead of my own child?
You can hire them and deduct the wages as a normal business expense, but the special FICA and FUTA exemptions for children under 18 apply specifically to your own children (or, for partnerships, children of the partners) not to grandchildren or other relatives.
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