Most business owners pay tax on their profits at 22%, 24%, or even 35%. Their teenage children, meanwhile, have a standard deduction they almost never use. Put your kids on the payroll for real work and you can move part of that income from your bracket to theirs, often to a 0% federal rate, while giving them a paycheck, work experience, and a head start on retirement savings.
Hiring your children is one of the few tax strategies Congress wrote into the code on purpose, and the 2026 numbers make it more valuable than ever. It also comes with rules the IRS checks closely in audits. With the fourth quarter about to start, now is the time to set it up properly so the wages you pay before December 31 count on this year’s return.
Why Hiring Your Kids Saves Tax in 2026
The math starts with the standard deduction. For 2026, a single filer, including a dependent child with earned income, can earn up to $16,100 in wages without owing any federal income tax. The business deducts those same wages as an ordinary expense, so every dollar you pay your child comes off your taxable profit at your top rate.
Your child can still be claimed as your dependent. The kiddie tax does not apply, because it only reaches unearned income such as interest and dividends, not wages from a job.
A Sample Calculation
Consider a sole proprietor in the 24% bracket who pays a 16-year-old $16,100 during 2026 for legitimate work:
| Tax Item | Parent Pays Without Hiring | After Hiring Child |
|---|---|---|
| Federal income tax on $16,100 | $3,864 | $0 (covered by child’s standard deduction) |
| Self-employment tax on $16,100 | About $2,275 | $0 (child exempt from FICA) |
| FUTA | Not applicable | $0 (child under 21 exempt) |
| Total family tax | About $6,139 | $0 |
Hire two children and the savings roughly double. The money stays in the family, but it is now your child’s money, which matters for how you use it.
Payroll Tax Rules Depend on Your Entity
The biggest variable is how your business is organized. The special payroll tax exemption only applies when the parents own the business directly.
- Sole proprietorship or single-member LLC owned by a parent: wages to a child under 18 are exempt from Social Security and Medicare taxes, and wages to a child under 21 are exempt from federal unemployment tax.
- Partnership or multi-member LLC owned only by the child’s parents: the same exemptions apply.
- S corporation or C corporation: no payroll tax exemption. You withhold and pay FICA like any other employee, but the income tax shift to the child’s standard deduction still works.
Many medical practices and professional firms operate as S corporations or professional corporations, so the savings are smaller but still meaningful. Some owners set up a separate parent-owned management company to employ family members. That can work when the company provides real services at fair prices, but it needs careful structuring and should be reviewed alongside your entity choice and owner compensation.
The Rules the IRS Will Check
The Tax Court has repeatedly allowed wages paid to children, and just as repeatedly disallowed them when the paperwork was missing. To hold up in an audit, the arrangement must look like any other job.
- Real work. Filing, scanning, cleaning, social media, data entry, inventory, and website updates are all common. Having your child appear in marketing photos or videos can count too.
- Age-appropriate duties. A 7-year-old can model for ads. A 7-year-old cannot credibly do your bookkeeping.
- Reasonable pay. Pay what you would pay an unrelated worker for the same task. $16,100 for 10 hours a month of filing will not survive scrutiny.
- Timesheets and a job description. Record dates, hours, and tasks, just as you would for any hourly employee.
- Actual payment. Pay through your payroll system into an account in the child’s name, on a regular schedule, not as a lump sum on December 31.
- Proper forms. Collect a Form W-4 and I-9, report wages on payroll returns, and issue a W-2 in January.
If you would be uncomfortable explaining the job, the hours, and the pay rate to an auditor, the arrangement needs work before you pay the first dollar.
Also check your state’s child labor rules on minimum age, permitted hours, and work permits. Family-business exemptions are common but not universal, and states that tax income may treat the wages differently than the federal rules do.
Turn Wages Into a Roth IRA
Earned income is what allows a child to contribute to an IRA. For 2026 the IRA contribution limit is $7,500, or the child’s earnings if lower. Because the child pays no income tax on wages up to the standard deduction, a Roth IRA is usually the obvious choice: no tax going in, and decades of tax-free growth coming out.
What a Head Start Looks Like
A 15-year-old who contributes $7,500 a year for four years, then never adds another dollar, could have well over $500,000 by age 65 at a 7% average return. The contributions (not earnings) can also be withdrawn tax-free if needed for college or a first home. Parents can gift money to cover the contribution as long as the child has at least that much earned income.
The rest of the wages can go toward expenses you would otherwise pay with after-tax dollars, such as a car, phone, or school costs, as long as the money is genuinely the child’s. Families using the new Trump Accounts can coordinate both savings vehicles.
Common Mistakes to Avoid
- Paying cash with no records. Without payroll records and timesheets, the deduction is easy for the IRS to deny.
- Assuming the FICA exemption applies to an S corporation. It does not, and the missed payroll taxes come with penalties.
- Treating them as contractors. A child doing ongoing work under your direction is an employee, not a 1099 independent contractor.
- Paying above the standard deduction without a plan. Wages above $16,100 are taxable to the child, though often at 10% or 12%, which may still beat your rate.
- Mixing duties with patient data. In a medical practice, keep minors away from protected health information unless they have been trained and it is necessary for the job.
The Bottom Line
Hiring your children is a legitimate, IRS-recognized way to cut your family’s tax bill, and in 2026 a single child can shelter up to $16,100 of business income while funding a $7,500 Roth IRA. The savings are real only if the job is real, the pay is reasonable, and the payroll is documented. Pair this strategy with others like the Augusta Rule and a solid retirement plan, and year-end planning starts to add up quickly.
Our tax strategy team can model the savings for your entity type, our payroll team can add family members correctly, and our bookkeeping and medical practice finance teams keep the records audit-ready. Schedule a free consultation before year-end and we will show you exactly how much hiring your kids could save in 2026.
