How to Pay Your Child From Your Business Tax-Free

You can pay your child from your business tax-free by putting them on payroll for real work at a fair wage, as long as your business is a sole proprietorship, a single-member LLC taxed as one, or a partnership in which both partners are the child’s parents. Under those structures, wages to a child under 18 escape Social Security and Medicare tax, and a child with no other income can earn up to $16,100 in 2026 before owing a dollar of federal income tax. Your business deducts every dollar of that wage as a normal business expense.

Does Your Business Structure Qualify

This is the first question, and getting it wrong wipes out the entire strategy.

Sole proprietorships qualify. So do partnerships where every partner is a parent of the child. A single-member LLC that hasn’t elected corporate tax treatment is a disregarded entity, which means the IRS treats it as a sole proprietorship for employment tax purposes.¹ A parent running that kind of LLC gets the same payroll tax breaks as a sole proprietor.²

Corporations do not qualify. If your business is an S-corp or a C-corp, wages to your child are subject to income tax withholding, Social Security, Medicare, and FUTA the same as any unrelated employee’s, no matter the child’s age.³ Partnerships with any partner who isn’t the child’s parent are out as well, and so are estates, even the estate of the child’s deceased parent.²

Which Taxes Your Child’s Wages Skip

Three separate exemptions can apply when the business qualifies, and each has its own age cutoff.

Social Security and Medicare

Wages paid to your child under 18 for work in your trade or business are exempt from the 6.2 percent Social Security tax and the 1.45 percent Medicare tax, on both the employee and employer sides. That’s up to 15.3 percent saved on every dollar.⁴ On the child’s 18th birthday, FICA starts applying to wages from that point forward.³

Federal Unemployment Tax

Wages paid to your child under 21 are exempt from FUTA, which normally runs 6.0 percent on the first $7,000 of annual wages (with most employers getting a credit that drops the effective rate to 0.6 percent).⁵ The FUTA break runs three years past the FICA cutoff, so an 18-, 19-, or 20-year-old child on your payroll still costs you no unemployment tax.²

Federal Income Tax Withholding

Withholding rules apply the same way they would for any employee, regardless of age.³ But if your child had no federal tax liability last year and expects none this year, they can claim exempt on Form W-4 and nothing gets withheld. You still need the W-4 in the file.

How Much Your Child Can Earn Before Owing Income Tax

A child claimed as a dependent gets a standard deduction equal to the greater of $1,350 or their earned income plus $450, capped at the regular single-filer standard deduction.⁶ For 2026, that cap is $16,100.⁷ A child whose only income is wages can earn every dollar up to that amount and owe no federal income tax.

Stack that against the FICA exemption for a child under 18 in a qualifying business, and the whole $16,100 clears free of federal income and payroll tax on your child’s side. On your side, the business deducts the same wages as an ordinary expense, so your own taxable income drops by whatever you paid.

What Counts as Real Work and Reasonable Pay

The tax benefits stand up only if the employment is genuine. Two tests matter: whether the work is something the business actually needs, and whether the pay matches what an unrelated person would earn for the same job.⁸

Answering phones, filing, organizing inventory, cleaning the office, managing social media, and basic data entry all qualify as legitimate business tasks. Set the wage against comparable local rates before your child’s first shift. Pay your 12-year-old $20 an hour for filing that normally goes for $15, and the IRS can reclassify the extra $5 as a nondeductible gift instead of a wage expense.⁸

Federal child labor rules are relaxed for family businesses. A child of any age can work for a business solely owned by their parents, with two limits: no one under 16 in manufacturing or mining, and no one under 18 in jobs the Secretary of Labor has declared hazardous.⁹ The family exemption does not extend to corporations or other entity types.¹⁰

Many states also require minors to hold an employment certificate or work permit. Age thresholds and exceptions for parent-owned businesses vary widely.¹¹ Check with your state labor department before the start date.

Paperwork Before the First Paycheck

Onboard your child the same way you’d onboard any hire. Skipping steps here is one of the fastest ways to lose the deduction in an audit.

A Social Security number. Your child needs one before you can report wages.
Form I-9. Federal law requires you to verify employment eligibility for every employee, including your own child. Review the identity documents and complete the form within three days of the first day of work.¹²
Form W-4. Your child fills this out. A child who expects to earn under $16,100 and had no prior-year tax liability can claim exempt, which zeroes out withholding.³
A written job description listing the specific tasks, hourly rate, and expected schedule.
Time records. Log start and end times for every shift. Digital timekeeping or a paper log both work, as long as they’re kept consistently.⁸

Running the Payroll and Filing the W-2

Pay your child from the business bank account, not your personal checking. Use business checks or direct deposit, and keep the payment tied to your company’s records. Mixing business and personal money makes it harder to prove the wages were a legitimate business expense. Hold to a consistent pay schedule, weekly or biweekly, the way you would with any other employee.

Deposit the wages into an account in the child’s name. Many banks offer custodial accounts under the Uniform Transfers to Minors Act, where a parent manages the account until the child reaches the state’s age of majority.¹³ A separate account creates a paper trail showing that the child received and controls the money.

By January 31 of the following year, file Form W-2 reporting the total wages with the Social Security Administration and give your child a copy.¹⁴ Deduct the wages on your business return: Schedule C for a sole proprietorship, or the partnership return for a qualifying partnership. A late or missing W-2 raises questions and can put the deduction at risk.

Turning the Earnings Into a Roth IRA

Once your child has earned income, they can contribute to a Roth IRA. A parent opens and manages it as a custodial Roth IRA until the child reaches adulthood.

The 2026 contribution limit is $7,500 or the child’s total earned income for the year, whichever is less.¹⁵ Earn $5,000, and $5,000 is the ceiling. Contributions go in after tax, but with earnings under $16,100 the child owes no federal income tax anyway, so the money effectively enters the account untaxed and compounds tax-free for decades. Start a Roth IRA for a 14-year-old and you get more than 50 years of growth before retirement withdrawals.

The cash doesn’t have to be the child’s actual paycheck. You or another family member can fund the account on the child’s behalf, up to the amount the child earned that year.

What Goes Wrong If the Arrangement Isn’t Genuine

If the IRS decides the work wasn’t real or the pay wasn’t reasonable, it can disallow the wage deduction on your business return and treat the excess as a nondeductible gift.⁸ Claim FICA or FUTA exemptions from an entity that doesn’t qualify, such as an S-corp or C-corp, and you can owe back payroll taxes with interest and penalties.²

The protection is simple. Pay a fair rate for actual work, keep time records and a written job description, run everything through business payroll, and file the W-2 on time. The IRS applies the same standard it would to anyone else’s teenager on your payroll.

1
Internal Revenue Service. Topic No. 554, Self-Employment Tax
2
Internal Revenue Service. Family Employees
3
Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
4
Office of the Law Revision Counsel. 26 USC 3121 – Definitions
5
Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide
6
Internal Revenue Service. Topic No. 551, Standard Deduction
7
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill
8
IRS.gov. Reasonable Compensation Job Aid for IRS Valuation Professionals
9
U.S. Department of Labor. Fact Sheet #43 – Child Labor Provisions of the Fair Labor Standards Act (FLSA) for Nonagricultural Occupations
10
U.S. Department of Labor. FLSA Child Labor Rules Advisor – Exemptions From Child Labor Rules in Non-Agriculture
11
U.S. Department of Labor. Employment/Age Certificate
12
U.S. Citizenship and Immigration Services. Instructions for Form I-9, Employment Eligibility Verification
13
Social Security Administration. POMS SI 01120.205 – Uniform Transfers to Minors Act
14
Social Security Administration. Deadline Dates to File W-2s
15
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500