If you run a family business, you can pay your child up to $16,100 in wages during 2026 with no federal income tax owed by either of you, and in the right business structure no Social Security, Medicare, or federal unemployment tax either. That is how to pay your kids tax-free at the federal level: the wages come off your business income as an ordinary expense, and your child’s standard deduction absorbs the rest. Everything else in this article is about the conditions that have to be true for that result to hold.
Your Business Structure Decides Whether the Payroll Tax Break Applies
The income tax deduction works no matter how your business is organized. The payroll tax exemptions do not. This is the first question to settle, because the wrong entity turns a tax-free arrangement into one that costs you 15.3% in FICA on every dollar you pay.
Sole Proprietorships and Parent-Only Partnerships
A sole proprietorship, or a partnership in which both partners are the child’s parents, is the structure this strategy was built around. Wages paid to a child under 18 are exempt from Social Security and Medicare taxes on both the employer and employee sides, and wages paid to a child under 21 are exempt from federal unemployment tax.1Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide2Office of the Law Revision Counsel. 26 USC 3306 – Definitions Combined, that’s a 15.3% payroll tax savings on every dollar of qualifying wages.
S-Corps and C-Corps
If your business is incorporated, the payroll tax exemptions do not apply. The IRS treats the corporation as a separate legal entity, so the child is employed by the corporation rather than by a parent. Standard FICA and FUTA taxes apply to the wages just as they would for any other employee.3Internal Revenue Service. Tax Treatment for Family Members Working in the Family Business You keep the income tax deduction. You lose the payroll tax savings.
Partnerships With Non-Parent Partners
The partnership exemption requires that every partner be a parent of the child. Add any other partner, whether a sibling, a friend, or an outside investor, and the exemption is gone. The child’s wages become subject to full FICA and FUTA withholding.1Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
LLCs Are Uncertain
If your business is an LLC, get professional advice before assuming you qualify. The IRS treats a single-member LLC as a disregarded entity for income tax, which suggests parity with a sole proprietorship, but its Publication 15 and family employment guidance name sole proprietorships and qualifying partnerships without explicitly addressing LLCs.1Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide In other contexts the IRS has taken the position that the LLC itself is the employer for employment tax purposes. Guessing wrong here means owing back payroll taxes plus penalties.
The Work Has to Be Real, and the Pay Has to Be Reasonable
Auditors know what to look for in family employment arrangements, and they do look. Two conditions have to hold for the wages to survive a challenge.
First, the tasks have to be ordinary and necessary business expenses, meaning work you would reasonably hire someone to do as part of running your business.4Office of the Law Revision Counsel. 26 US Code 162 – Trade or Business Expenses Household chores don’t count. Mowing the home lawn, washing the family car, and babysitting siblings are personal, not business, no matter how the check is cut.
Second, the pay has to be reasonable for the services performed. Paying a teenager $50 an hour for filing when the market rate is $15 gets the excess disallowed.
Work that tends to hold up under audit includes:
- Office and administrative work such as data entry, filing, answering phones, and organizing inventory
- Digital tasks like managing social media, updating the website, and editing photos or videos
- Physical work including cleaning office or retail space, stocking shelves, and assembling mailers
- Marketing support such as modeling for product photos, distributing flyers, and helping at events
Putting a child on payroll for work they never actually perform is the fastest way to lose the deduction and draw penalties.
Documentation the IRS Expects
Legitimate family employment usually stands or falls on paperwork. The standard is the same as for any other employee.
Write a job description for each child on payroll. It should list specific duties, expected deliverables, and the pay rate. Keep contemporaneous time sheets or work logs signed by the child and a supervising parent. Save samples of the actual work produced: screenshots of the social posts they managed, copies of the data they entered, photos of the inventory they organized.
Support the pay rate with outside data. Wage figures for comparable positions in your area or industry answer the auditor’s obvious question about why a 14-year-old is earning what you’re paying them.
Run payroll the ordinary way. Issue a Form W-2 at year end reporting the wages as earned income.5Internal Revenue Service. About Form W-2, Wage and Tax Statement Income tax withholding rules still apply to a child’s wages in a family business even when the FICA and FUTA exemptions apply.3Internal Revenue Service. Tax Treatment for Family Members Working in the Family Business If the child’s wages will stay below the standard deduction, they can file a Form W-4 claiming exemption from withholding so nothing is pulled from the paycheck. The child still needs to file a Form 1040 if gross income exceeds the filing threshold or if any federal income tax was withheld.
How Much You Can Pay Before Any Tax Is Owed
The single-filer standard deduction for 2026 is $16,100.6Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Wages up to that ceiling are wiped out on the child’s return, leaving no federal income tax owed. On your side, that same amount comes off your business income at your marginal rate.
Paying more than $16,100 is fine when the work justifies it. Dollars above the standard deduction are taxed at the child’s own rates, which start at 10% on the first $12,400 of taxable income. That’s still typically far below the parent’s rate, so the income shift keeps saving money above the tax-free line, just not all of it.
Child Labor Rules Still Apply
Federal wage and hour law gives parent-owned non-agricultural businesses unusual flexibility. Children under 16 working in a business solely owned by their parents can work any hours and at any time of day, without the scheduling restrictions that apply to other minor employees.7U.S. Department of Labor. FLSA – Child Labor Rules Advisor
The exemption does not cover hazardous work. Parents cannot employ their children in manufacturing, mining, or any occupation the Department of Labor has declared hazardous, a list of 17 categories that includes work with explosives, motor vehicle operation, power-driven machinery, roofing, excavation, and demolition.8U.S. Department of Labor. FLSA – Child Labor Rules
State child labor laws can be stricter than federal law, adding minimum age requirements, permit or certificate obligations, and tighter hour limits. The federal exemption does not override stricter state law. Check your state labor department before you start.
Turning the Wages Into a Roth IRA
Earned income unlocks a Roth IRA contribution. For 2026, the annual limit is $7,500 or the child’s total earned income, whichever is less.9Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 A child earning $16,100 can put $7,500 into a Roth and still keep $8,600 in cash.
The Roth is the right choice over a traditional IRA here. A traditional IRA gives a deduction, but the child’s income is already sheltered by the standard deduction, so the deduction is worthless. The Roth flips the trade: contributions go in with dollars that were effectively untaxed, and qualified withdrawals in retirement come out tax-free, along with decades of growth.
Nothing requires the child to fund the account from their own paycheck. A parent can gift the $7,500, and the child contributes it, as long as the child actually earned at least that amount during the year.
State Taxes and Financial Aid
All of the above is federal. State income tax may still hit the wages, because state standard deductions and filing thresholds are often lower than the federal amount, and a few states have payroll tax rules that don’t mirror the federal FICA and FUTA exemptions. Check your state tax agency before assuming the wages are entirely tax-free.
If college is coming, factor in the FAFSA. Student income is assessed at a higher rate than parent income when calculating expected family contributions, so wages that cut your tax bill can also cut need-based aid. Funding a Roth IRA helps here, because retirement accounts are generally excluded from FAFSA asset calculations, but the tradeoff is worth running for your own situation before you commit.
One last thing to watch: the standard deduction, IRA limit, and tax brackets all adjust for inflation. The numbers here are 2026 figures. Pull the new IRS inflation adjustments each fall to reset your ceiling for the following year.