Can I Pay My Child a Salary? IRS Rules and Tax Benefits

Yes, you can pay your child a salary from your business, and the tax code rewards you for doing it properly. In 2026, a child can earn up to $16,100 in wages and owe no federal income tax because the standard deduction absorbs the entire amount.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Your business deducts those wages as an ordinary expense, and if you operate as a sole proprietorship, neither you nor your child owes Social Security or Medicare tax on the pay while the child is under 18. The catch is that the work has to be real, the pay has to be reasonable, and the paperwork has to look like any other employee’s.

What Counts as Legitimate Work

The IRS treats wages to your child as a deductible expense only when they qualify as ordinary and necessary — meaning the work genuinely helps your operations and is common in your industry.2Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses Cleaning your kitchen or mowing the family lawn does not qualify. Filing paperwork, shredding documents, organizing inventory, answering phones, updating a company website, cleaning the office, or running social media for the business does.

Pay has to match what you would offer an unrelated employee for the same task. Paying a 14-year-old $50 an hour to shred documents will not survive review. Look at what local businesses pay for comparable work and stay within that range. If the IRS decides the rate is inflated, it can recharacterize the excess as a gift, which erases both the deduction and the tax benefit.

To hold up under scrutiny, treat your child the way you would any hire:

  • A written job description with duties, required skills, and expected hours.
  • Contemporaneous timesheets showing dates, hours, and tasks.
  • A consistent pay schedule — weekly, biweekly, or monthly — rather than sporadic lump sums.
  • The same performance expectations you would set for an outside employee doing the job.

How Much Tax You Actually Save

Three benefits stack. The business deducts the wages, reducing your taxable income dollar for dollar. The child pays no federal income tax on wages up to the $16,100 standard deduction. And if your entity qualifies, the wages escape Social Security, Medicare, and federal unemployment tax entirely.

Run the math on a parent in the 24% federal bracket paying a child $16,100. The deduction saves roughly $3,864 on your return. Your child owes nothing on the wages. When the payroll tax exemptions apply, you also skip the combined 15.3% in FICA that would otherwise attach to those wages, worth about another $2,463. If your child earns above the standard deduction, only the excess is taxed, and it starts at the 10% bracket. A child earning $20,000 in wages would owe income tax on roughly $3,900 at 10%, or about $390.

A child claimed as a dependent has a standard deduction equal to the greater of a set minimum or earned income plus $450, capped at the regular standard deduction amount.3Internal Revenue Service. Standard Deduction Your child generally needs to file a return if earned income exceeds the standard deduction, and filing anyway is worth it if income tax was withheld during the year, because that is how the refund comes back.4Internal Revenue Service. Check if You Need to File a Tax Return

Payroll Taxes Depend on Your Business Structure

Whether the FICA and FUTA exemptions apply comes down to how your business is organized. Getting this wrong means back taxes, penalties, and interest.

Sole Proprietorships and Parent-Only Partnerships

Wages paid by a sole proprietorship to the owner’s child under 18 are exempt from Social Security and Medicare tax.5Office of the Law Revision Counsel. 26 USC 3121 – Definitions Wages paid to the child under 21 are exempt from federal unemployment tax.6Office of the Law Revision Counsel. 26 USC 3306 – Definitions Those same exemptions extend to a partnership only if every partner is a parent of the child.7eCFR. 26 CFR Part 31 – Employment Taxes and Collection of Income Tax at Source

A single-member LLC that has not elected corporate tax treatment is a disregarded entity, so the IRS treats it as a sole proprietorship for employment tax purposes. The FICA and FUTA exemptions apply when that LLC employs the owner’s child.8Internal Revenue Service. Family Employees

Federal income tax withholding still applies even when the payroll tax exemptions do. If your child expects to earn less than the standard deduction and had no tax liability the previous year, they can claim exempt on the W-4 so nothing is withheld.9Internal Revenue Service. Tax Treatment for Family Members Working in the Family Business

Corporations and Mixed Partnerships

None of the payroll tax exemptions apply to a C-corporation or an S-corporation, even if you are the sole shareholder. The child’s wages are subject to Social Security, Medicare, FUTA, and income tax withholding on the same footing as any other employee.9Internal Revenue Service. Tax Treatment for Family Members Working in the Family Business The same is true for a partnership if any partner is not a parent of the child.7eCFR. 26 CFR Part 31 – Employment Taxes and Collection of Income Tax at Source You still get the business deduction and the income-shifting benefit; you just lose the payroll tax savings.

Child Labor Rules You Still Have to Follow

The Fair Labor Standards Act generally restricts when and where minors can work, but it carves out a parent exemption. When the business is solely owned by a parent, you can hire your own child at any age for non-hazardous, non-agricultural work, and the usual age minimums and hour caps do not apply.

The exemption stops at hazardous occupations. Federal regulations list 17 categories of work that no minor between 16 and 18 may perform, regardless of who the employer is:

  • Operating power-driven machinery such as woodworking equipment, metal-forming machines, bakery machines, and meat-processing equipment.10eCFR. Occupations Particularly Hazardous for the Employment of Minors Between 16 and 18 Years of Age
  • Any work in or around coal mines, other mines, or active logging operations.
  • Driving a motor vehicle as part of the job, with limited exceptions for 17-year-olds in light vehicles.
  • Work at facilities that manufacture or store explosives, or work involving ionizing radiation.
  • Roofing, demolition, and trenching or excavation.

A single violation carries a civil penalty of up to $16,035 per child. If a violation causes death or serious injury, the penalty rises to $72,876 and can be doubled for willful or repeat violations.11eCFR. Part 579 – Child Labor Violations, Civil Money Penalties State law often adds hour restrictions during the school year that go beyond the federal parent exemption, so check with your state labor department before setting a schedule.

Setting Up Payroll and Filing at Year-End

Before the first shift, complete the same onboarding you would for any employee:

  • Form I-9 to verify identity and work authorization. Every employer must complete this for every hire, including a family member.12U.S. Citizenship and Immigration Services. I-9, Employment Eligibility Verification
  • Form W-4 to set withholding. A child who expects to earn under the standard deduction and had no tax liability last year can write “exempt.”
  • The child’s Social Security number, exactly as it appears on the card, for payroll and tax forms.
  • A short written employment agreement stating job title, duties, pay rate, schedule, and start date. Not required by law, but one of the strongest audit defenses.
  • Timesheets recording dates, hours, and tasks for every shift.

Pay from the business bank account, never from personal funds. Use a check or direct deposit to an account in the child’s name so the paper trail reads as a business expense.

After year-end, issue Form W-2 for total wages and any tax withheld, and file with the Social Security Administration by January 31.13Social Security Administration. Deadline Dates to File W-2s Give your child a copy by the same date. The SSA shares the wage data with the IRS, which cross-checks it against the deduction you claimed.

Turning the Wages Into a Roth IRA

Once your child has earned income, they can contribute to a Roth IRA at any age. The only requirement is taxable compensation. For 2026, the contribution limit is $7,500 or total earned income, whichever is less.14Internal Revenue Service. Retirement Topics – IRA Contribution Limits You can gift the contribution money as long as the child actually earned at least that much during the year. Most brokerages offer custodial Roth IRAs that a parent manages until the child reaches adulthood, and the contributions grow tax-free for decades.

Mistakes That Get the Deduction Thrown Out

Family payroll draws closer IRS scrutiny than ordinary payroll. The recurring problems:

  • Paying for chores rather than business tasks. Washing the family car or watching siblings is not a business expense.
  • Inflated wages. A ten-year-old at $30 an hour to organize files will trigger questions. Base pay on market rates for the task.
  • No records. Without timesheets, pay stubs, or a job description, the IRS can disallow the entire deduction.
  • Lump-sum payments. A single year-end check reads like a gift dressed up as wages. Pay on a regular schedule.
  • Claiming the FICA exemption when your business is a corporation, or when a non-parent partner is involved. That produces back taxes and penalties, not savings.

When the pay is reasonable, the work is real, and the paperwork matches what you would keep for any employee, the benefits of hiring your child are settled and widely used. The formality is the point.