You can pay your child up to $16,100 in 2026 for working in your business without either of you owing federal income tax on those wages, as long as the pay is reasonable for the work performed and you handle the paperwork like any other hire. If your business is a sole proprietorship or a partnership owned only by the child’s parents, wages to a child under 18 also escape Social Security and Medicare tax. The dollar ceiling isn’t arbitrary: it matches the 2026 standard deduction for a single filer, which wipes out income tax on earned income up to that amount.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments from the One, Big, Beautiful Bill
What Counts as Reasonable Pay
The $16,100 figure is a tax ceiling, not a rate card. The IRS expects your child’s wages to reflect what you would pay any unrelated person for the same work with similar skills. A 12-year-old filing papers once a week does not earn $50,000. If the wage is out of line with the work, the IRS can disallow it as a business deduction.2Internal Revenue Service. Paying Yourself
To set a defensible rate, look at what local employers or freelancers charge for the specific tasks your child performs. A teenager running your social media should be paid roughly what a freelance social media manager in your area earns per hour. A 14-year-old organizing inventory should earn something in line with local retail stock clerks. Job boards, salary databases, and local classifieds all work as benchmarks. Save what you find.
A written job description helps. The IRS weighs the nature and scope of the work, the hours devoted to it, and the employee’s qualifications when it evaluates whether compensation is reasonable.3Internal Revenue Service. Reasonable Compensation Job Aid for IRS Valuation Professionals Write down what the child does, when they do it, and how many hours they put in each week.
How the Tax Math Works
Two things happen when you put your child on the payroll. You deduct the wages as a business expense, which drops your taxable income at your marginal rate. Your child reports the wages but owes no federal income tax on the first $16,100 because a dependent’s standard deduction equals earned income plus $450, capped at $16,100 for 2026.4Internal Revenue Service. Publication 501 (2025), Dependents, Standard Deduction, and Filing Information
Anything above $16,100 gets taxed on the child’s return starting in the 10% bracket, which covers the first $12,400 of taxable income for a single filer in 2026. Compared with what you would owe on the same income at your bracket, the gap is the whole point of the strategy.
One thing that trips people up: wages to a child are still subject to federal income tax withholding even in a qualifying structure. The child usually gets it all back at filing time because their income falls under the standard deduction. To skip the refund cycle, your child can file a Form W-4 claiming exemption from withholding if they had no tax liability last year and expect none this year.5Internal Revenue Service. Tax Treatment for Family Members Working in the Family Business
Payroll Tax Exemption Depends on Your Business Structure
Whether you save on Social Security, Medicare, and unemployment tax depends entirely on how your business is organized.
Sole Proprietorships and Parent-Only Partnerships
Wages paid to a child under 18 are exempt from Social Security and Medicare tax if your business is a sole proprietorship or a partnership in which both partners are the child’s parents. Wages to a child under 21 are also exempt from federal unemployment tax.6Internal Revenue Service. Family Employees Combined Social Security and Medicare comes to 15.3% across the employer and employee shares, so skipping it on roughly $16,000 in wages saves about $2,450.
Corporations and Partnerships with a Non-Parent Partner
The exemption does not apply if your business is a C-corporation or S-corporation. The corporation is the legal employer, not you personally, so the child is not working in the employ of a parent. FICA and FUTA apply to the child’s wages regardless of age. The same is true of any partnership that includes a partner who isn’t the child’s parent.6Internal Revenue Service. Family Employees
The Single-Member LLC Problem
A single-member LLC gets treated as a sole proprietorship for income tax purposes but as a separate entity from its owner for employment tax purposes. Because the LLC itself is the legal employer, the FICA exemption for wages paid by a parent under 26 U.S.C. § 3121(b)(3) doesn’t reach your child.7Office of the Law Revision Counsel. 26 U.S. Code 3121 – Definitions The income tax side of the strategy (your deduction and the child’s standard deduction) still works. If you want the payroll tax savings too, talk to a tax professional about whether restructuring makes sense.
What Work Your Child Can Legally Do
Federal child labor law relaxes considerably for a business entirely owned by a parent. Children of any age can work in a parent-owned business as long as the work isn’t in mining, manufacturing, or an occupation the Secretary of Labor has declared hazardous.8U.S. Department of Labor. Fact Sheet #43 – Child Labor Provisions of the Fair Labor Standards Act (FLSA) for Nonagricultural Occupations There is no federal minimum age and no hour limit for a younger child in non-hazardous work at a parent-owned sole proprietorship.
The hazardous-work ban still applies to anyone under 18, family business or not. Prohibited categories include operating power-driven woodworking or metalworking machines, roofing, excavation, logging, working with explosives or radioactive materials, and driving on public roads except in narrow circumstances for 17-year-olds.9eCFR. 29 CFR Part 570 – Child Labor Regulations, Orders and Statements of Interpretation Answering phones, filing, data entry, cleaning, stocking shelves, packaging orders, and running social media are all fine.
State labor laws can add restrictions that apply even inside family businesses. Check your state’s department of labor before setting a schedule.
Paperwork You Need to Keep
Treat this like any other hire. Skipping the formalities is the fastest way to make a legitimate arrangement look like a sham.
Have your child fill out a Form W-4 for withholding purposes.10Internal Revenue Service. About Form W-4, Employee’s Withholding Certificate Complete and retain a Form I-9 to verify employment eligibility. Pay through a formal payroll system: real paychecks or direct deposits to a bank account in the child’s name. Cash with no paper trail is the wrong move.
Keep timesheets showing hours worked and tasks performed, signed by both of you. At year end, issue a Form W-2. For the 2026 tax year, you must furnish the W-2 to your child and file it with the Social Security Administration by February 1, 2027.11Internal Revenue Service. General Instructions for Forms W-2 and W-3
Turning Wages into a Roth IRA
Once your child has earned income, they can contribute to a Roth IRA. The 2026 limit is $7,500 or the child’s total earned income for the year, whichever is less.12Internal Revenue Service. Retirement Topics – IRA Contribution Limits A child who earned $5,000 can contribute up to $5,000.
The child doesn’t have to fund it from their own paycheck. A parent can gift the contribution as long as the child’s earned income covers the amount. You open a custodial Roth IRA with yourself as custodian; it transfers to the child at the age of majority under your state’s rules. Contributions grow tax-free, and Roth contributions can be withdrawn at any time without penalty, which lets the account double as an emergency fund later.
What Goes Wrong If You Get It Wrong
Two separate agencies enforce two separate parts of this arrangement, and both have teeth.
If the IRS decides the wages weren’t reasonable or the work wasn’t real, it disallows the deduction. Your business income goes up by the full disallowed amount, you owe tax on it plus interest, and the IRS can add an accuracy-related penalty of 20% of the underpayment if it finds negligence.13Internal Revenue Service. Accuracy-Related Penalty An inflated wage for token work is the classic negligence flag.
On the labor side, violating federal child labor rules carries civil penalties of up to $16,035 per child per violation. If a violation causes serious injury or death, the penalty rises to $72,876, and either figure can double for repeat or willful violations.14eCFR. 29 CFR Part 579 – Child Labor Violations – Civil Money Penalties Family businesses get no leniency on hazardous-work assignments.
Compliance is not hard. Pay a market rate for real work, document what the child does, respect the hazardous-work list, and confirm your business structure actually qualifies for the payroll tax exemption before you assume it does. Most families who lose this fight didn’t try to cheat; they just skipped the paperwork and couldn’t reconstruct it when someone asked.