Who this applies to
Business owners with children who can do real, age-appropriate work in the business.
Key questions
- Is your business a sole proprietorship, a parents-only partnership, or a corporation?
- What would you pay an unrelated person for the same work?
- Do you have timesheets and payroll records for your child?
Review with the OICPA team
- Confirm whether the family payroll tax exemption applies to your entity
- Set a reasonable wage and run it through payroll
- Open a Roth IRA for the child's earned income
On this page
Paying your children to work in your business can move income from your tax bracket to theirs. Done correctly, a child can earn several thousand dollars with no federal income tax, and in some businesses no payroll tax either. Done carelessly, the wages can be disallowed in an audit. The rules below are what make the difference.
The work and the pay have to be real
The IRS treats wages to your child like wages to anyone else. That means:
- The child does actual work for the business, such as filing, cleaning, inventory, social media, data entry, or helping at events.
- The pay is reasonable for the work and the child's age. Pay what you would pay an unrelated person of similar skill.
- You keep records: a short job description, timesheets, and proof of payment to the child's own account.
- You run it through payroll and issue a Form W-2. Cash handed over at year-end is hard to defend.
Payroll taxes depend on how your business is set up
This is where most of the savings, or the surprises, come from.
- Sole proprietorship, or a partnership owned only by the child's parents: wages to a child under 18 are exempt from Social Security and Medicare tax. Wages to a child under 21 are exempt from federal unemployment tax.
- S corporation, C corporation, or a partnership with other partners: there is no family exemption. The wages are subject to Social Security, Medicare, and unemployment tax like any other employee's.
An LLC taxed as a sole proprietorship counts as a sole proprietorship here. An LLC that elected S corporation status does not.
How much a child can earn without federal income tax
A dependent child's standard deduction for 2026 covers earned income up to $16,100. Wages up to that amount are generally free of federal income tax for the child. Wages above it are taxed at the child's own rates, starting at 10%. The kiddie tax applies to investment income, not to wages.
A worked example
Say you are a sole proprietor in the 24% federal bracket and pay your 15-year-old $12,000 for real work during the year.
- Your business deducts $12,000, which saves about $2,880 of federal income tax.
- You also avoid roughly $1,695 of self-employment tax on that income.
- Your child owes no federal income tax on the $12,000 and, because of the family exemption, no Social Security or Medicare tax.
That is about $4,575 of federal tax saved, before any state tax savings. If the same business were an S corporation, payroll taxes of about 15.3% would apply to the wages, so the savings would be smaller.
Put the money to work: a Roth IRA
A child with earned income can contribute to a Roth IRA, up to the lesser of their earned income or $7,500 for 2026. Money that went untaxed on the way in can grow tax-free for decades.
State rules still apply
Check your state's child labor rules, work permit requirements, and state payroll registration. Some states do not follow the federal payroll tax exemption.
See the numbers for your business
The Small Business Tax Savings Calculator and the Owner Tax Planner both include a "hire your children" option that applies these payroll tax rules to your structure. If you decide to go ahead, our payroll team can set up the payroll correctly.
Frequently asked questions
How young can my child be?
There is no fixed federal minimum age, but the work has to be real and suitable for the child's age, and the pay has to match the work. The younger the child, the more carefully you should document what they did and why the pay is reasonable.
Do I have to file a W-2 for my child?
Yes. If you pay your child wages, run them through payroll and issue a Form W-2, even when no tax is withheld. You also file your state's payroll reports.
Can I avoid payroll tax by paying my child through my S corporation?
No. The family exemption from Social Security and Medicare tax only applies to a sole proprietorship or a partnership owned only by the child's parents. Wages paid by an S corporation or C corporation are subject to payroll taxes.
What if my child earns more than $16,100?
The amount above $16,100 is taxed at your child's own rates, starting at 10%. That is usually still lower than your top rate.
What can the money be used for?
The wages belong to your child. They can go into a Roth IRA, a savings account, or toward the child's own expenses. Paying wages and then using the money for ordinary household costs weakens the arrangement if the IRS ever looks at it.
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