For 2026, you can pay your child up to $16,100 a year in wages from your business with no federal income tax owed by either of you, and if your business is a sole proprietorship or a partnership where both partners are the child’s parents, those wages also escape Social Security, Medicare, and federal unemployment tax while the child is under 18.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 20262Internal Revenue Service. Family Employees Separately, each parent can gift the child another $19,000 for the year with no tax consequences on either side.3Internal Revenue Service. What’s New — Estate and Gift Tax Stacked together, and paired with a Roth IRA, the numbers move real money to your child while shrinking your own tax bill.
Why $16,100 Is the Wage Ceiling
The number comes from the single-filer standard deduction. For 2026, that deduction is $16,100, so a child whose only income is wages up to that amount has no federal income tax liability.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Your business still deducts the wages as ordinary compensation under Internal Revenue Code Section 162, which permits deductions for reasonable pay for services actually rendered.4Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses The money leaves your marginal bracket and lands in your child’s zero bracket, and your taxable business income drops by the same amount.
The kiddie tax does not touch this. That rule only applies to unearned income like interest and dividends above $2,700, and wages earned for actual work are excluded from the calculation.5Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income (Kiddie Tax)6Internal Revenue Service. 2025 Instructions for Form 8615 – Tax for Certain Children Who Have Unearned Income
If your child has investment income on top of wages, the filing threshold shifts and some tax may apply. For a dependent with only earned income, no return is generally required until earnings pass the standard deduction; add unearned income and the threshold drops.7Internal Revenue Service. Publication 501 (2025), Dependents, Standard Deduction, and Filing Information
When Wages Also Skip Payroll Taxes
Employment tax treatment depends entirely on how your business is organized. Get this wrong and you leave thousands on the table.
In a sole proprietorship, or a partnership where every partner is a parent of the child, two federal exemptions apply to that child’s wages:2Internal Revenue Service. Family Employees
- Social Security and Medicare (FICA) taxes are not owed on wages paid to a child under 18.8Office of the Law Revision Counsel. 26 USC 3121 – Definitions
- Federal unemployment tax (FUTA) is not owed on wages paid to a child under 21.2Internal Revenue Service. Family Employees
FICA normally runs 15.3% of wages: 6.2% for Social Security and 1.45% for Medicare on both the employer and employee sides.9Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates Avoiding it on $16,100 in wages is worth roughly $2,463 next to hiring any unrelated worker for the same job. A parent in the 24% bracket paying a child under 18 the full $16,100 can save over $6,300 in combined federal taxes.
A single-member LLC that has not elected corporate tax treatment is a disregarded entity for federal employment tax purposes, so it follows the sole-proprietorship rule and the child’s wages should qualify for the same exemptions.
If your business is an S-corporation, C-corporation, or a partnership that includes anyone besides the child’s parents, the exemptions disappear. Your child is taxed like any other employee, and only the income tax deduction and the child’s standard deduction remain.2Internal Revenue Service. Family Employees This is worth sorting out before you cut the first paycheck, because the entity structure drives the size of the savings.
Once the child turns 18, FICA applies. FUTA runs until 21. The income tax shelter through the standard deduction keeps working regardless of age.
What Counts as Real Work and Reasonable Pay
The wages have to be for actual services, and the pay has to match what you would give a non-relative doing the same job. Paying a seven-year-old $100 an hour to file paperwork will be recharacterized as a non-deductible gift, and once that happens the business deduction and the payroll tax exemptions both go with it.
Tasks that hold up include filing, office cleaning, social media work, basic bookkeeping, data entry, inventory counts, equipment maintenance, and packaging. The child needs to actually perform them on a consistent basis. A token arrangement where checks move but no work happens will not survive an audit.
The tax code sets no minimum age, but the child has to be capable of the assigned tasks. A ten-year-old can plausibly shred documents or sort inventory. A five-year-old billed as a marketing consultant is a problem. The IRS looks at the nature of the work, the hours logged, and whether the pay rate lines up with the market for the same tasks.
Stacking a Roth IRA on Top of the Wages
Once the child has earned income, a Roth IRA extends the tax-free treatment for decades. There is no minimum age. The only requirement is compensation, and the 2026 contribution limit is $7,500 or the child’s total taxable compensation for the year, whichever is less.10Internal Revenue Service. Retirement Topics – IRA Contribution Limits
The child pays no income tax on the wages because of the standard deduction, and qualified Roth withdrawals in retirement are also tax-free. The same dollars may never be taxed at any point in the child’s life. Custodial Roth IRAs are available at most brokerages, with the parent managing the account until the child reaches the age of majority under state law.
Gifts on Top of Wages
Employment is the strongest lever because it produces a business deduction, but the annual gift tax exclusion adds another tax-free channel that requires no work at all.
For 2026, each parent can give each child up to $19,000 without gift tax and without eating into the lifetime exemption.3Internal Revenue Service. What’s New — Estate and Gift Tax A married couple can split gifts and move up to $38,000 per child per year, though splitting requires filing Form 709 even when no tax is due.11Internal Revenue Service. About Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return Gifts are excluded from the recipient’s gross income under federal law, so the child owes no income tax on them.12Office of the Law Revision Counsel. 26 USC 102 – Gifts and Inheritances The trade-off is that gifts are not deductible by you, which is why wages come first when the child can actually work.
Two categories sit outside the $19,000 cap entirely. You can pay unlimited tuition to an eligible educational institution and unlimited medical expenses to a provider, as long as you pay the institution or provider directly rather than routing money through the child.13Office of the Law Revision Counsel. 26 USC 2503 – Taxable Gifts The tuition exclusion covers tuition itself, not room, board, books, or supplies; those still count against the $19,000 if you cover them. Practically, that means you can pay a $60,000 college tuition bill directly and still gift the child $19,000 for living expenses in the same year.
Documentation That Keeps the Deduction
All of this collapses if the paperwork does not hold up. If the IRS decides the employment is not real, the wages become non-deductible gifts, and the business loses the deduction, faces back taxes and penalties, and forfeits the FICA and FUTA exemptions retroactively.
Keep the records any employer would keep for any employee:
- Time sheets showing dates, hours, and a short description of tasks for each shift.
- A written job description covering duties, expected hours, and pay rate.
- Proof of payment, ideally direct deposit or checks into the child’s own bank account rather than cash.
- Form W-2 issued to the child at year-end, reporting wages paid and any taxes withheld.
- Form I-9 completed and retained for employment eligibility, the same as for any hire.14USCIS. Instructions for Form I-9, Employment Eligibility Verification
Your business still files payroll tax returns even when FICA and FUTA do not apply, because the wages themselves have to be reported. The child generally does not need to file a return if earnings stay at or below $16,100 and there is no unearned income, though filing anyway creates a clean record of qualifying compensation for a Roth IRA contribution.7Internal Revenue Service. Publication 501 (2025), Dependents, Standard Deduction, and Filing Information
Federal Labor Rules Still Apply
Tax law sets no minimum age, but federal labor law does, and the two operate independently. In a non-agricultural business solely owned by a parent, children under 16 can work any hours at any time of day.15U.S. Department of Labor. FLSA – Child Labor Rules Advisor – Exemptions from Child Labor Rules in Non-Agriculture Hazardous work is off-limits to anyone under 18 regardless of who owns the business, including power-driven equipment, roofing, demolition, mining, and work with explosives or radioactive materials.16U.S. Department of Labor. What Jobs Are Off-Limits for Kids? Many states also require work permits for minors starting around age 14 even when the employer is a parent, so check your state labor department before the first shift.