Hiring Your Children in Your Business: 2026 Tax Rules

Hiring your children in your business lets you deduct reasonable wages you pay them, while your child often owes little or no federal income tax because of the standard deduction. If you run a sole proprietorship or a partnership owned only by the parents, wages paid to a child under 18 also escape Social Security and Medicare taxes. The work has to be real, the pay reasonable and the payroll handled properly.

This guide explains the 2026 rules for hiring your children, which business structures get the payroll tax break, how to set a defensible wage, a worked example with numbers, and the records that keep the arrangement safe in an audit. It is general information, not tax advice; confirm the details for your situation with a tax professional.

Why hiring your children saves tax

The savings come from three places at once:

• Your deduction. Reasonable wages are a business expense. In a sole proprietorship they reduce both income tax and self-employment tax on your profit.
• Your child's low tax rate. For 2026, a single filer's standard deduction is $16,100, and a dependent with earned income gets the greater of $1,350 or earned income plus $450, up to that $16,100. A child earning wages of $16,100 or less, with no other income, generally owes no federal income tax.
• Payroll tax exemptions. In qualifying structures, a child under 18 pays no Social Security or Medicare tax, and no federal unemployment (FUTA) tax applies until 21.

The standard deduction figures come from the IRS's 2026 inflation adjustments in Revenue Procedure 2025-32. The 2027 amounts are announced separately each autumn; see our guide to 2027 tax brackets and standard deduction for the latest status.

FICA and FUTA rules by business type

The IRS family employees page sets out which wages escape payroll taxes. The structure of your business matters more than anything else.

Who employs the child	Income tax withholding	Social Security and Medicare	FUTA
Parent's sole proprietorship (including a single-member LLC taxed as a disregarded entity)	Applies if wages exceed what the W-4 exempts	Not owed while the child is under 18	Not owed while the child is under 21
Partnership in which every partner is a parent of the child	Applies	Not owed while the child is under 18	Not owed while the child is under 21
S corporation or C corporation	Applies	Owed at any age	Owed at any age
Partnership with any non-parent partner	Applies	Owed at any age	Owed at any age

If your company is an S corporation, the income tax shifting still works, but you will pay normal employer payroll taxes on the child's wages. Our overview of employer payroll taxes explains what those cost.

What work can children do, and what is a reasonable wage?

The IRS and the courts look at two questions: did the child actually do the work, and is the pay what you would pay an unrelated person for the same work? Age-appropriate tasks are the key.

Age range	Typical genuine tasks	Pay guidance
Under 10	Modeling in product photos or ads, simple sorting	Small, per-session amounts at local modeling or similar rates
10 to 13	Filing, shredding, stuffing envelopes, cleaning the office, packing orders	Local entry-level hourly rates, limited hours
14 to 17	Social media posts, data entry, reception, inventory, basic bookkeeping, website updates	Market rate for the role, often at or above local minimum wage

Federal child labor rules allow children of any age to work for a business wholly owned by their parents in non-hazardous jobs, with extra restrictions on mining, manufacturing and hazardous occupations. State law may require work permits or limit hours, so check your state labor department.

Pay by the hour from a timesheet rather than a round annual figure. A child who logs 6 hours a week at $15 has a defensible wage; a 9-year-old paid $16,000 for unspecified help does not.

Step by step: putting your child on payroll

1. Write a simple job description. List tasks, expected hours and the hourly rate, with a note of how you set it (local job ads or minimum wage).
2. Collect forms. Form W-4 for withholding, Form I-9 for employment eligibility and any state forms. Your child needs a Social Security number.
3. Set up payroll correctly. Flag the employee as exempt from FICA and FUTA only if your structure qualifies. If you are new to this, our guides to hiring your first employee and doing payroll yourself walk through the setup.
4. Track time. Use a timesheet template signed weekly or a time-tracking app.
5. Pay from the business account into an account in the child's name, on a regular payday.
6. File year-end forms. Issue a Form W-2 and send it to the Social Security Administration with a Form W-3 transmittal.
7. Consider a Roth IRA. Your child can contribute up to the lesser of earned income or $7,500 for 2026.

Worked example: sole proprietor hires a 16-year-old

These numbers are illustrative. James runs a home-based print shop as a sole proprietor with $120,000 of net profit before family wages. His 16-year-old daughter works 15 hours a week during the school year and more in summer, about 800 hours a year, packing orders and editing product photos at $15 an hour.

Item	Amount
Wages paid (800 hours x $15)	$12,000
James's federal income tax saved at an assumed 22% marginal rate	about $2,640
James's self-employment tax saved ($12,000 x 92.35% x 15.3%)	about $1,695
Social Security and Medicare on the daughter's wages	$0 (under 18, sole proprietorship)
Daughter's federal income tax (wages below $16,100 standard deduction)	$0
Approximate family federal tax saved	about $4,300

The SE tax line simplifies by ignoring the small interaction with the deduction for half of SE tax. James also keeps claiming his daughter as a dependent because she saves her pay, and she puts $5,000 into a custodial Roth IRA. Had his business been an S corporation, the payroll tax exemption would not apply, so the savings would be smaller.

Common mistakes when you hire your kids

• No payroll, just transfers. Paying allowance-style transfers and calling them wages at year end is the fastest way to lose the deduction.
• Unreasonable pay. Wages far above the market rate for the task get reduced, and the excess is treated as a nondeductible gift.
• Wrong structure for the FICA exemption. Corporations and partnerships with non-parent partners do not qualify.
• Spending the wages on the child's normal support. If the pay just funds groceries and clothes you would buy anyway, examiners may question whether the wages are real. Keep the money in the child's own account.
• Forgetting state rules. Some states have their own unemployment, payroll and labor rules for minors.
• Missing W-2s. Late or missing information returns bring penalties even when no payroll tax is due.

Edge cases: S corporations, older children and state tax

If your business is an S corporation

The S corporation can still deduct reasonable wages, and your child still benefits from the standard deduction, so the income tax shift works. What you lose is the payroll tax exemption: the company pays the employer share of Social Security and Medicare and FUTA, and withholds the employee share. For a child earning $10,000, that is roughly $1,530 of combined FICA plus a small FUTA amount. Some families create a separate sole proprietorship or parents-only partnership, for example a marketing or management business owned by the parents, which bills the S corporation for services and employs the children. That only works if the second business is real, has its own invoices, bank account and records, and charges a fair price. A structure that exists only to move payroll is easy for an examiner to collapse.

Children aged 18 to 20

From 18, wages in a sole proprietorship become subject to Social Security and Medicare, but FUTA still does not apply until 21. College-age children working summer jobs in the business can still save the family income tax if they are in a lower bracket than you.

State income tax and unemployment

Most states follow the federal treatment of wages, but state standard deductions are often lower, so a child may owe a small amount of state tax. State unemployment insurance rules for family employees differ from FUTA, so check your state's rules before assuming no state payroll tax applies.

Kiddie tax

The kiddie tax applies to a child's unearned income, such as dividends and interest, above a threshold ($2,700 for 2026). It does not apply to wages, which is one reason earned income from a family business is treated more favorably than shifting investments to a child.

Hiring your children alongside other family tax strategies

Family employment often goes together with hiring your spouse, which brings different benefits such as retirement contributions and health reimbursement plans. Owners of S corporations sometimes add the Augusta Rule for meetings at home. Teens with their own self-employment income, such as babysitting or freelance design for outside clients, are a separate case: they may owe self-employment tax once net earnings reach $400 and should keep their own records.

What to do if you are audited

Bring the job description, timesheets, payroll records, bank statements showing payment into the child's account, W-2s and examples of the work. Examiners mainly test whether the work happened and whether the rate matches the task. Contemporaneous timesheets usually settle both questions. If your records are thin for a past year, talk to a tax professional before the meeting rather than producing new documents.

Running a family business means keeping the client side tidy too. Invoice your customers on time and keep clean income records with our free invoice generator: no sign-up, and every invoice downloads as a PDF ready for your books.