Did you know your business may legally pay your children, which could potentially reduce your taxes at the same time? This article explains how hiring your kids can convert family expenses into deductible wages, outlines the IRS rules for 2026, and shows which business structures benefit most. If you are a business owner with children, this is a strategy worth understanding.
Hire your kids, turn their wages into tax savings
When structured correctly, wages paid to your children become deductible business expenses, reduce your taxable income, and — depending on your entity type — may avoid certain payroll taxes altogether. For sole proprietors and qualifying LLCs, this could potentially lead to annual tax savings.
This strategy is legitimate, well-established, and especially effective for family-owned businesses, but it is not one-size-fits-all. Understanding the rules is essential before putting it into practice.
Family payroll tax exemptions explained
Under normal circumstances, employers must pay payroll taxes on employee wages, including Social Security and Medicare (FICA) taxes, and federal unemployment (FUTA) taxes. Employees also pay their share of Social Security and Medicare taxes. State unemployment taxes vary by state law.
When you employ certain family members, however, the IRS provides targeted payroll tax exemptions. These exemptions vary based on the worker’s relationship to the business owner and the owner’s entity type.
Hiring children in an LLC or sole proprietorship
If you operate as a sole proprietor or a single-member LLC taxed as a disregarded entity, the rules are especially favorable. According to the IRS, if you hire your child who is:
- Under age 18: Wages are exempt from Social Security and Medicare taxes.
- Under age 21: Wages are exempt from federal unemployment taxes.
Your child also does not pay Social Security or Medicare taxes on those wages. As a result, compensation paid to a minor child can be completely free of federal payroll taxes. In addition, the wages are fully deductible as a business expense, reducing both income tax and self-employment tax exposure.
Let’s look at how this works
Assume you operate a single-member LLC and pay your child a reasonable wage for legitimate work performed during the year. You deduct the compensation as a business expense, lowering your taxable income. Because of the family payroll tax exemptions, neither you nor your child owes federal payroll taxes on those wages.
Your child reports the income on their own return. Thanks to the standard deduction for dependents, a portion — or in some cases, all — of that income may be taxed at low or zero federal rates, depending on the amount earned. If the child earns less than the standard deduction, which is $16,100 in 2026, no federal income tax is owed by the child.
The combined result is a shift of income from a higher-taxed parent to a lower-taxed child, with no payroll tax cost.
Paying your child a salary must be legitimate
This strategy only works if the employment is real and the compensation is reasonable. Your child must:
- Perform actual work that is appropriate for their age.
- Be paid a wage comparable to what you would pay a non-family employee.
- Receive proper documentation, including time records and payroll reporting.
Common roles often include office support, filing, social media assistance, cleaning, inventory organization, photography, modeling for marketing materials, and basic administrative tasks.
Permanent tax treatment for single-member LLCs
The IRS has clarified that a single-member LLC taxed as a disregarded entity is treated the same as a sole proprietorship for family employment tax purposes.
This means owners of qualifying single-member LLCs may use the same payroll tax exemptions available to sole proprietors when hiring their children. This treatment has been settled law for more than a decade and remains in effect for 2026.
Husband-and-wife-owned LLCs
A husband-and-wife-owned LLC is often taxed as a partnership unless a special election applies. Even so, hiring your child can still qualify for the family employment tax exemptions if the child is related to all partners.
For married couples who are the only members of the LLC, this requirement is usually satisfied. As a result, the business may still avoid payroll taxes on wages paid to minor children.
Hiring your child in an S Corporation or a C Corporation
Corporation owners receive a small tax benefit. When a corporation hires your child:
- Social Security and Medicare taxes apply.
- Federal unemployment taxes generally apply.
- Wages remain deductible to the business.
Because payroll taxes are imposed, the overall savings are significantly reduced compared with a sole proprietorship or qualifying LLC. That said, paying your child a salary may still be more tax-efficient than providing financial support with after-tax dollars.
No kiddie tax on earned income
Parents often worry about the kiddie tax when shifting income to children. Fortunately, the kiddie tax does not apply to earned income. As long as your child is paid for actual work performed, the wages are treated as earned income and are not subject to kiddie tax rules.
FAQs
Can I hire my child at any age?
Yes, provided the work is appropriate for the child’s age and complies with federal and state labor laws. Very young children are often used in modeling, marketing, or simple administrative roles.
How much can I pay my child?
You may pay a reasonable wage for the work performed. There is no specific IRS cap, but compensation must align with market rates and job duties.
Do I need to run payroll for my child?
Yes. Even though payroll taxes may not apply, you must still issue a W-2, track hours, and maintain payroll records.
Can my child contribute to a Roth IRA?
Yes. Earned income from your business may allow your child to contribute to a Roth IRA, subject to annual contribution limits.
Does this strategy still work in 2026?
Yes. The family employment payroll tax exemptions remain in effect for 2026, although standard deductions, tax brackets, and wage thresholds are adjusted periodically for inflation.
Hiring your children can deliver benefits that extend beyond tax savings. You can teach responsibility, instill a work ethic, and involve your family in your business. When implemented correctly, wages paid to minor children may be exempt from federal payroll taxes while remaining fully deductible. The result is lower income taxes, reduced self-employment taxes, and a more efficient way to support your family using business dollars.
For more information, contact your wealth advisor. If you’re not already a Mercer Advisors client, let’s talk.
