Hiring Your Children Through Your Business: A 2026 Tax Strategy Guide for Business Owners

Paying your children legitimate wages through your business is one of the most underused tax strategies available to small business owners. Done correctly, you deduct the wages at your top marginal rate, your child owes zero federal income tax on up to $16,100 in earnings, and those wages create IRA eligibility — letting you fund a Roth IRA for your child at an effective 0% tax rate. For sole proprietors and qualifying partnerships, children under 18 are also exempt from Social Security and Medicare taxes entirely. This guide explains the IRS rules, the mechanics by entity type, the documentation you need, and the numbers.

Why this strategy works: income shifting

The core economics are simple. Every dollar your business pays your child in wages:

• Reduces your taxable income — as a business expense deduction at your marginal rate (often 37% federal for high-income owners, plus state)
• Becomes income for your child — who, in most cases, has little or no other income and pays federal income tax at a much lower rate (often 0%)

For a business owner in the 37% federal bracket, shifting $15,000 of business income to a child who owes zero federal income tax saves approximately $5,550 in federal income tax on that amount alone — before accounting for payroll tax savings. The child keeps the money. The money is real wages for real work. The IRS permits it — and has for decades.

Entity type determines your FICA savings

The most important variable is your business entity. Payroll tax treatment for children differs significantly depending on how your business is structured.

The FICA exemption is significant. The combined employee + employer FICA rate is 15.3% on wages up to the Social Security wage base (2026: $184,500 per IRS Notice 2025-67). On $15,000 of wages, that's $2,295 in payroll taxes that never get paid when a sole proprietor employs their child under 18. For an S-corp owner, FICA applies on all wages, which reduces — but does not eliminate — the overall family tax savings.

The 2026 standard deduction: your child's best friend

A child who can be claimed as your dependent has a standard deduction for 2026 equal to the greater of $1,350 or their earned income plus $450 — capped at the regular standard deduction of $16,100 for single filers.²

In plain terms: if your child earns wages and has no significant other income, they owe zero federal income tax on approximately the first $15,650 of wages (since earned income + $450 = their standard deduction, and wages minus standard deduction = $0 taxable income up to roughly that level).

The Roth IRA multiplier

Wages paid to your child create earned income — and earned income is the prerequisite for IRA contributions. In 2026, any person with earned income can contribute up to $7,500 to a Roth IRA (or their earned income, whichever is less).³

If you pay your 15-year-old child $10,000 for real work, they can contribute up to $7,500 of that into a Roth IRA. The contribution is made with already-tax-free dollars (the wages were under the standard deduction). The Roth IRA grows tax-free for 50+ years. Compound math at that time horizon is staggering: $7,500 invested at 7% annual return grows to over $200,000 by the time the child reaches 65.

You can use your money to fund the Roth IRA contribution on their behalf, as long as the total does not exceed their earned income and the annual limit. The child just needs to have actually earned the income from legitimate work.

What types of work qualify

The IRS requires that wages paid to your child reflect legitimate services at reasonable pay for the work performed. The test is the same as for any employee: what would you pay a third-party to perform the same work?

Common roles that work well at various ages:

• Ages 8–12: Shredding documents, cleaning office or warehouse space, filing, labeling, basic inventory tasks. $8–$12/hour is defensible for honest physical work.
• Ages 13–15: Data entry, social media posting, photography for marketing materials, website content updates, answering phones, light bookkeeping data entry. $12–$18/hour.
• Ages 16+: Social media management, video editing, graphic design, customer service, light bookkeeping, administrative support, research tasks. $15–$25/hour depending on skill and market rates.

The work must actually be performed. Hours must actually be worked. The wage must be what you'd pay a non-family employee or contractor for the same tasks. Paying your 10-year-old $50/hour as a "marketing consultant" will not hold up.

Does the kiddie tax apply to wages?

No. The kiddie tax is one of the most common misconceptions in this area, and it does not apply to earned income. Here is the rule precisely:

The kiddie tax (IRC § 1(g)) taxes a child's unearned income (dividends, interest, capital gains, distributions) above a threshold ($2,700 for 2026) at the parent's marginal rate.⁴ Wages are earned income, not unearned income. The kiddie tax has no effect on the child's wages. Your child's $15,000 in wages is taxed at the child's own rate — which is zero if wages are under the standard deduction — regardless of your tax rate.

The kiddie tax is relevant if you want to gift appreciated securities to your child or have the business pay dividends to your child who owns shares. For the wages strategy described in this guide, it is not a concern.

Employing your spouse

The strategy is different for spouses. Wages paid to your spouse through a sole proprietorship are subject to FICA — there is no payroll tax exemption for a spouse the way there is for children under 18. However, employing your spouse legitimately does allow them to establish their own 401(k) deferral eligibility, HSA eligibility, and Social Security work record if they otherwise lack one. The income-shifting benefit is generally smaller (spouses share a household budget, and spousal wages flow through to the same household) — but the benefit access and Social Security record aspects can be valuable in certain situations.

Documentation: what you need

The IRS has full authority to challenge family employment arrangements that lack a genuine economic substance. The documentation that separates a legitimate arrangement from one that gets reclassified as a disguised gift or owner draw:

1. A written employment agreement or offer letter stating the job title, duties, hourly rate or salary, and start date. For teenagers, this can be a simple one-page document.
2. Time records. A log (even a simple spreadsheet) of dates worked, hours, and tasks performed. Must be contemporaneous — not reconstructed at year-end.
3. Payroll checks or ACH payments from the business account to the child personally. Cash payments to family members, with no paper trail, are the single biggest red flag in an audit. The child should have their own bank account.
4. A W-2 issued at year-end. Even if the child owes $0 in tax, a W-2 must be issued. This also documents the earned income for IRA contribution purposes.
5. A reasonable wage rate. If you paid a non-family member $15/hour for the same work, pay your child $15/hour. Not $50/hour. If challenged, the IRS compares to market rates for the specific tasks and the child's age and skill.

Common mistakes that invite IRS scrutiny

• No actual work performed. Paying a child who was away at school full-time and performed no documented tasks is a gift, not wages. The IRS will reclassify it.
• Unreasonably high wages. $100/hour for a 10-year-old's "consulting services" has been challenged and disallowed in Tax Court. Stay market-rate for the work and age.
• Cash payments with no records. No bank transfer, no W-2 issued. This is the profile of a fake arrangement.
• Forgetting payroll setup for S-corps. If you operate an S-corp, your child must be on payroll with proper FICA withheld and remitted. Failing to withhold and remit FICA creates employer liability regardless of the age exemption (which doesn't apply to S-corps).
• Using the wages to pay the child's personal expenses directly. The wages should be paid to the child. The child can then contribute to a Roth IRA, save, or spend — but the flow must be: business → child → child's account → child's expenses. The parent can help the child fund the Roth IRA from separate funds, as long as the child has sufficient earned income to justify the contribution.
• Paying for personal chores. Paying your child to mow the family lawn or do household dishes is not a business deduction. The work must be for the business.

Putting it all together: the full-stack savings

A sole proprietor in the 37% federal bracket who has a 14-year-old child, paying them $15,000/year for documented social media management and marketing photography:

• Business deducts $15,000 → saves $5,550 in federal income tax at 37%
• SE tax savings (FICA exempt for under-18 in sole prop): $15,000 × 15.3% = $2,295
• Child owes $0 in federal income tax (wages below the ~$15,450 effective threshold)
• Child contributes $7,500 to Roth IRA from wages — funded with pre-tax-equivalent dollars
• Family first-year benefit: $7,845 in immediate tax savings + $7,500 in Roth IRA started at age 14

Over a 5-year period at $15,000/year: roughly $39,000 in total tax savings, $37,500 in Roth IRA contributions, and a child heading to adulthood with a real investment account and a Social Security work record.

This is legal, well-settled IRS-approved tax planning — not a loophole. The IRS's own guidance explicitly acknowledges that wages paid to family members are deductible when the work is real and the rate is reasonable.¹ A fee-only financial advisor who specializes in business owner planning can help you structure this correctly alongside your retirement plan and overall business tax strategy.