Paying Your Children in Your Business: Tax Strategy Guide 2026

If your children perform real work for your business and you pay them reasonable wages, those wages are a deductible business expense — shifting income from your 32–37% bracket to their $0 effective rate. Sole proprietors get an extra layer: wages paid to a child under 18 are completely exempt from Social Security and Medicare taxes. Add a Roth IRA contribution from the child's earned income, and you've created a multigenerational tax strategy from a single paycheck. Here's how it works, what the rules require, and how much it's actually worth.

Why this works: the dependent standard deduction

A child claimed as a dependent on your tax return has their own standard deduction — calculated as the greater of $1,350 or their earned income plus $450, up to the single filer standard deduction of $16,100 in 2026.¹

In practice, this means a dependent child can earn up to $15,650 before owing any federal income tax ($15,650 + $450 = $16,100 = single standard deduction).

Meanwhile, your business deducts those same wages at your full marginal rate — 24%, 32%, or 35% depending on where your income lands.

The FICA exemption: sole proprietors and partnerships only

Under IRC §3121(b)(3)(A), wages paid to a child under age 18 by a parent's sole proprietorship (or a qualifying partnership where each partner is a parent of the child) are entirely exempt from Social Security and Medicare (FICA) taxes.² Under IRC §3306(c)(5), wages paid to a child under 21 are also exempt from FUTA.

This exemption has two important limitations:

If you currently run an S-corp and want to maximize the child employment benefit, one approach is to have the child perform services directly for a separate sole proprietorship — a consulting entity or side business that isn't the S-corp. Many small business owners operate a primary S-corp alongside a sole prop for this exact reason. Your CPA can advise on whether this is appropriate for your situation.

Tax savings calculator

The Roth IRA funding opportunity

A child who earns wages from your business has earned income — which means they can contribute to a Roth IRA. In 2026, the IRA contribution limit is $7,500 per person (under age 50).³ If your 12-year-old earns $7,500 working in your business, they can contribute the full $7,500 to a Roth IRA. You can gift them the money to cover the contribution if they've spent their wages.

The compounding math is extreme at early ages. $7,500 invested in a Roth IRA at age 12, growing at a 7% nominal rate:

Tax-free. From a $7,500 seed funded by wages your child earned in your business — wages that also reduced your own tax bill by $2,000–$5,000+.

Key Roth IRA rules for minors:

• The child must have earned income equal to or exceeding the contribution
• A parent or guardian custodian opens a "custodial Roth IRA" on the child's behalf (Fidelity, Schwab, and Vanguard all offer these)
• Contributions are limited to the lesser of earned income or the $7,500 annual IRA limit
• There are no age restrictions for Roth IRA contributions — as long as there's earned income

Age-appropriate work and reasonable wages

The IRS requires that the work be real and the compensation be reasonable. A 10-year-old cannot be a $50/hour social media strategist. But a 10-year-old can legitimately perform real tasks at rates a real employer would pay for them. The standard is "would you pay an unrelated person this amount for this work?"

At $15/hour for 15 hours per week over 40 weeks (academic year + summer breaks), a 14-year-old earns $9,000 — fully tax-free, with $7,500 of it available for a Roth IRA contribution.

Payroll setup: what you actually need to do

The child is an employee, not a contractor. Do not use a 1099-NEC for child wages — that would make the child "self-employed," which creates self-employment tax for the child. W-2 wages are the correct treatment.

1. Have the child complete a W-4 — they should claim enough withholding allowances to avoid over-withholding (typically Single with 0 or 1 allowances; their effective rate will be 0%, but the W-4 is required)
2. Pay regularly from your business bank account — weekly, biweekly, or monthly. Cash payments from your personal account undermine the employment relationship
3. Keep time records — a simple log showing date, tasks performed, and hours worked. Not elaborate, but it needs to exist
4. File Form 941 quarterly (sole props) — even if no withholding is required, you must file to report wages paid. Check the boxes indicating no federal income tax withheld and no FICA due (for exempt child wages)
5. Issue a W-2 by January 31 — wages go in Box 1 (wages); Boxes 3 and 5 (social security and Medicare wages) will be $0 for exempt child wages under sole prop
6. File Form 1040 for the child if wages exceed $14,600 — technically required when gross income exceeds the standard deduction, but since the standard deduction for a dependent with earned income covers up to $15,650, no tax will be owed below that threshold

Documentation checklist

• Written job description with specific tasks and expected hours
• Time log (weekly entries are sufficient — paper or spreadsheet)
• Payroll records showing amounts, dates, and payment method
• Bank statement showing payments from business account to child
• W-4 on file for the child
• W-2 issued by January 31
• Form 941 filed quarterly

You don't need an employment contract for minor children, but having a one-page written description of the role is useful if the IRS ever asks. The goal is to demonstrate this is a real employment relationship at a defensible wage rate — not a disguised distribution to a family member.

Common mistakes

Using a 1099 instead of a W-2

Paying a child as a contractor creates self-employment income for the child, which means self-employment tax applies — eliminating most of the FICA benefit. Always use W-2 wages for children in a family business.

Paying through an S-corp when you could use a sole prop

If you have consulting income or a side business that operates as a sole prop alongside your S-corp, routing child wages through the sole prop rather than the S-corp preserves the FICA exemption. This requires genuine services performed for the sole prop business, not just a payroll reclassification.

Wages well above market rate for the role

Paying a 12-year-old $40/hour for "administrative tasks" creates an obvious audit target. The wages must be reasonable for the role and age. If challenged, the IRS can reclassify excess amounts as family distributions, disallowing the deduction and assessing back taxes plus penalties.

No actual work performed

The single biggest mistake: putting a child on payroll without any real work product or time records. This is the version that gets audited and loses. The work must be genuine, documented, and performed — even if the child is young and the tasks are simple.

Overlooking the Roth IRA opportunity

The tax deduction alone is valuable, but funding a Roth IRA for the child turns the strategy into a multigenerational wealth move. If your 14-year-old earns $7,500 and contributes $7,500 to a Roth IRA annually for just four summers (ages 14–17), they'll have accumulated $30,000 in contributions that could grow to $500,000+ by retirement age — entirely tax-free.

How child employment stacks with other strategies

Child employment complements the other family employment strategies on this site:

• Hire your spouse — second set of solo 401(k) contribution limits, up to $120,000+ in combined annual retirement savings
• S-corp accountable plan — reimburse both you and your spouse's business expenses tax-free; child employment wages don't interact with the accountable plan
• Augusta Rule — rent your home to the business for up to 14 days; unrelated to child employment but layers on top of the family-strategy stack
• Solo 401(k) — child wages do not affect solo 401(k) eligibility as long as you don't hire non-spouse, non-child employees in the business
• Self-employed deductions overview — child wages are a Schedule C deduction for sole props, treated like any other legitimate business expense

Frequently asked questions

Can I hire my child and still claim them as a dependent?

Yes. Hiring your child and claiming them as a dependent are completely separate questions. The child must still meet the dependency tests (age, residency, support). Earning wages does not disqualify a child from being your dependent as long as they don't provide more than 50% of their own support.

Do I need to pay my child minimum wage?

Federal child labor law exempts family businesses under certain conditions — a minor child can work in a family sole prop or partnership without federal minimum wage requirements applying. However, the IRS reasonable compensation standard still applies: the wage must be what you'd pay a third party for the same work. Most parents pay at or above minimum wage anyway since below-minimum wages look like a sham.

My child is 19 and in college — do the FICA exemptions still apply?

No. The FICA exemption under §3121(b)(3)(A) applies only to children under 18. FUTA exemption continues until age 21. Once your child is 18+, their wages through your sole prop are subject to full FICA — though the income tax shift to their lower bracket still applies if their income is under the standard deduction or in a lower bracket than yours.

Can I hire my nephew or cousin instead of my own child?

The FICA exemption under §3121(b)(3)(A) is specifically for a parent's child — it does not extend to nieces, nephews, or cousins. Hiring other family members in your business is allowed, but FICA applies the same as for any employee.

What if my child doesn't want to spend their wages?

You can fund the Roth IRA contribution on their behalf with your own funds, as long as the child's earned income equals or exceeds the contribution. The IRS doesn't require that the same dollars that were earned are the dollars contributed — only that the child has earned income in that amount. If they earn $7,500, you can pay their expenses and contribute $7,500 to their Roth IRA yourself.