Hiring Your Kids: How a $16,100 Paycheck Saves a Family $3,711

The question we hear most is some version of "can I just deduct my kid's allowance?" You cannot. Hiring your children works only when the child does real work for the business, at a wage you could defend for that work, with payroll records to prove it.

The other mistake is assuming every business gets the payroll tax exemption. An S corporation does not, and that is where most owner-operators we talk to have already landed.

1. How the money moves to a lower bracket

Wages you pay your child are a business expense, so they come off your profit at your top rate. The same dollars land on the child's return, where the standard deduction absorbs them.

A child you can claim as a dependent gets a smaller standard deduction than an adult. Rev. Proc. 2025-32 puts the 2026 figure at the greater of $1,350 or earned income plus $450, never more than the regular $16,100 for a single filer. Wages of $15,650 or more therefore earn the full $16,100, and a child paid exactly $16,100 with no other income has no taxable income.

That is why we use $16,100 in the example. Pay above it and the excess is taxed at the child's rate, starting at 10%, which can still beat yours.

2. The payroll tax exemption, and who gets it

Section 3121(b)(3)(A) of the Code exempts from Social Security and Medicare any "service performed by a child under the age of 18 in the employ of his father or mother." You can read the full text of section 3121. Federal unemployment tax has its own exception for a child under 21 working for a parent, in section 3306(c)(5).

The IRS family employees page applies both exceptions only when the employer is the parent's sole proprietorship or a partnership in which each partner is a parent of the child. If the business is a corporation, or a partnership with any other partner, the child's pay is subject to Social Security, Medicare and FUTA at any age. Income tax withholding rules apply in every case, regardless of age.

A single-member LLC owned by a parent still qualifies, as long as it has not elected to be taxed as a corporation. A disregarded LLC is treated as a corporation for employment taxes, but Treasury Regulation 31.3121(b)(3)-1(d) treats the owner as the employer for this exception, and 31.3306(c)(5)-1(d) does the same for FUTA. An LLC with an S election is a corporation and loses the exemption.

3. The family's return, before and after

A married couple files jointly. One spouse runs a sole proprietorship with $150,000 of profit in 2026 before any wages to the kids, they have no other income, and they take the $32,200 standard deduction. Their 16-year-old works 805 hours across the year at $20 an hour, which is $16,100. Both versions take the 20% section 199A deduction. The figures are federal tax before credits; state income tax, state unemployment tax and payroll service fees are left out.

The family pays $3,711 less: $2,275 of self-employment tax and $1,436 of income tax. That is about 23 cents on each dollar of wages, and the $16,100 now belongs to the child instead of sitting in the parents' account.

4. Why an S corporation owner gets a smaller win

An S corporation is a corporation for payroll purposes, so your child's wages carry Social Security and Medicare from the first dollar. On $16,100 that is $1,231.65 withheld from the child and $1,231.65 paid by the company, $2,463.30 in total, plus federal unemployment tax. Our post on S-corp salary explains how the same payroll rules shape what you pay yourself.

The income shift still works inside an S corporation. The wages are deductible, and the child's standard deduction still shelters them. You lose the payroll tax exemption, which in our example was the larger part of the saving.

Some owners with an S corporation and a separate sole proprietorship or parents-only partnership hire the kids through the unincorporated business. That holds up only if the child's work is for that business, it has its own revenue, and the wages are booked and paid there.

5. The Roth IRA your child can open

A Roth IRA needs taxable compensation, and wages count. IRS Publication 590-A says contributions can be made "regardless of your age," and limits them to the smaller of the annual cap or the child's taxable compensation. The 2026 IRA limit is $7,500, set in Notice 2025-67.

In our example the child could put $7,500 of the $16,100 into a Roth IRA in the child's name for 2026. Roth contributions are not deductible, but the child owed no income tax on these wages anyway, so a Roth gives up nothing compared with a traditional IRA.

6. The kiddie tax does not reach wages

The kiddie tax taxes part of a child's investment income at the parents' rate. It is built on "net unearned income" in section 1(g)(4), which counts only income "not attributable to earned income." The Form 8615 instructions say earned income includes "wages, tips, and other payments received for personal services performed."

So the $16,100 in our example is outside the kiddie tax entirely. For 2026 the tax starts once unearned income passes $2,700, twice the $1,350 amount in Rev. Proc. 2025-32.

7. What makes the wage hold up

The deduction rests on Treasury Regulation 1.162-7: "a reasonable allowance for salaries or other compensation for personal services actually rendered." Reasonable means what "would ordinarily be paid for like services by like enterprises under like circumstances." Pay a 16-year-old $20 an hour to file receipts, and the rate needs a basis, such as what you would pay an unrelated teenager for the same job.

The work also has to fit the child's age. Under federal child labor law, the Department of Labor's nonagricultural fact sheet says children of any age are generally permitted to work for businesses entirely owned by their parents, except that those under 16 may not work in mining or manufacturing and no one under 18 may do work the Secretary of Labor has declared hazardous. State law can add its own limits.

Duties that tend to fit: filing, scanning receipts, data entry, social media posts, cleaning a shop or rental unit, stocking shelves, answering the phone. Pay by check or direct deposit into an account in the child's name, and keep a dated timesheet for each pay period.

Then report it like any other job. The 2026 Form W-2 instructions require a W-2 for any employee whose pay had tax withheld, or would have had income tax withheld but for a W-4 exemption claim. With no withholding, the cutoff is $2,000 of wages, a threshold P.L. 119-21 raised from $600 and that is adjusted for inflation each year after 2026. At $16,100, your child gets a W-2 either way.

8. Steps before your child's first paycheck

• Check the entity. The payroll tax exemption needs a parent's sole proprietorship, a parent's single-member LLC with no corporate tax election, or a partnership owned only by the child's parents. It covers Social Security and Medicare until the child turns 18 and FUTA until 21.
• Write a job description. List the tasks, the hours and the hourly rate, and note where the rate came from.
• Put the child on payroll. Collect a Form W-4, run each paycheck through payroll, and issue a W-2 in January.
• Keep timesheets. Dated entries for each pay period, kept with the payroll records.
• Size the wage. $16,100 uses the child's full 2026 standard deduction. Above that, compare the child's rate with yours.
• Fund the Roth. Up to $7,500 for 2026, no more than the child earned.

Our bookkeeping and payroll work sets the child up on payroll correctly for your entity, books the wages to the business, keeps the timesheets with the pay records and files the W-2 on time. Book a call with your 2025 return, your entity type, and a list of what each child could actually do in the business. If the work is not there to support a wage, we will say so before anyone gets paid.

General information for owner-operators, not tax advice. Thresholds change and state treatment varies; confirm current requirements for your own facts before acting.