Hiring Your Children in the Family Business
How paying your kids for real work shifts income to a lower bracket, when payroll taxes disappear, and the records that keep it legitimate.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
Paying your children a reasonable wage for real work moves business income from your tax bracket to theirs. Their standard deduction can shelter much of it from income tax, and if the business is a sole proprietorship or a partnership owned only by the parents, wages to a child under 18 are also exempt from Social Security and Medicare tax.
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How does the tax saving work?
The business deducts the wage. The child reports it as earned income, which is not subject to the kiddie tax, and the child's standard deduction ($16,100 for 2026 for a single filer) covers wages up to that amount before any income tax applies. Above that, the child's income starts in the lowest bracket.
When do payroll taxes not apply?
| Business structure | Social Security and Medicare (child under 18) | Federal unemployment tax (child under 21) |
|---|---|---|
| Sole proprietorship owned by a parent | Exempt | Exempt |
| Partnership owned only by the child's parents | Exempt | Exempt |
| Partnership with a non-parent partner | Taxable | Taxable |
| S corporation or C corporation | Taxable | Taxable |
| Single-member LLC owned by a parent (disregarded) | Exempt | Exempt |
In a corporation, the child is an employee of the corporation, not the parent, so normal payroll taxes apply — though the income-shifting benefit remains.
What makes the arrangement legitimate?
- Real work. Filing, cleaning the shop, social media, data entry, answering phones, inventory — tasks suited to the child's age.
- Reasonable pay. What you would pay an unrelated person of similar skill for the same job.
- Records. Timesheets, a job description, and pay by check or transfer into an account in the child's name.
- Payroll paperwork. A W-4 from the child, a W-2 at year end, and state filings as required. Wages paid by a parent's sole proprietorship to a child under 18 still go on a W-2, even though no Social Security or Medicare tax is withheld.
Courts disallow wages to very young children for implausible work, round-number payments with no time records, and money that stays in the parent's account.
Can the child put the wages in a Roth IRA?
Yes. A child with earned income can contribute to a Roth IRA up to the lesser of their earnings or the annual limit ($7,500 for 2026). The contributions grow tax-free and, decades later, come out tax-free. For many families this is the most valuable part of the strategy.
Frequently asked questions
Is there a minimum age?
No legal minimum for tax purposes, but the work must fit the child's age, and state child labor laws apply. Wages to a young child for adult-level work invite challenge.
Do I need to file a W-2 for my child?
Yes, if you paid wages. The W-2 is how the child reports earned income — which is also what makes a Roth IRA contribution possible.
Can I hire my children through my S corporation?
Yes, but the payroll tax exemptions do not apply. Some families have a parent-owned sole proprietorship or partnership provide management services to the corporation and employ the children there; the structure must have real substance.
Does the child have to file a tax return?
Only if earned income exceeds the standard deduction ($16,100 for 2026) or other filing thresholds apply, though filing to claim a refund of withheld tax can make sense.
Official sources
For a child employed in a parent's sole proprietorship or in a partnership in which each partner is a parent of the child, the IRS explains: “Payments for the services of a child under the age 18 are not subject to social security and Medicare taxes.” — Internal Revenue Service, Family employees, https://www.irs.gov/businesses/small-businesses-self-employed/family-employees
The IRS explains: “Payments for the services of a child under age 18 who works for their parent in a trade or business aren’t subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child.” — Internal Revenue Service, Publication 15 (2026), (Circular E), Employer’s Tax Guide, https://www.irs.gov/publications/p15
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk sets up family payroll correctly from the first paycheck. See pricing or book a free fit call.
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