You can pay your kids tax-free by putting them on the payroll of a family business that qualifies for the parent-employer payroll tax exemptions, paying them a reasonable wage for actual work, and keeping their annual earnings at or below the standard deduction. Done right, a child can earn up to $16,100 in 2026 with zero federal income tax and, in a qualifying structure, zero Social Security, Medicare, or federal unemployment tax. The wages come off your business income at your marginal rate, which is where the real family savings come from.
How Much You Can Pay and What It Saves
The 2026 standard deduction for a single filer is $16,100.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A child whose wages don’t exceed that figure owes nothing in federal income tax. On your side of the ledger, those same wages are a deductible business expense that reduces your taxable income at whatever bracket you’re in.
Here’s what that looks like in practice. A parent in the 32% bracket pays a 15-year-old $16,100 during 2026 for legitimate work in the business. The parent’s income tax drops by $5,152. If the business qualifies for the FICA exemption described below, the parent also skips $2,463 in Social Security and Medicare tax on those wages. The child files a return, applies the standard deduction, and owes $0. Total federal savings: about $7,615 on a single child.
You can go above $16,100 if the work supports it. The excess simply gets taxed at the child’s rates, starting at 10%, instead of yours. A child paid $20,000 would owe federal income tax on $3,900, or roughly $390, compared with the $6,400 you’d owe at 32% on the same amount.
Which Business Structures Qualify
The payroll tax piece of this strategy depends entirely on how your business is organized. Pick the wrong structure and you keep the income tax deduction but lose the FICA and FUTA savings.
Sole Proprietorships and Parent-Only Partnerships
These are the structures that make the strategy work in full. Wages a parent pays to a child under 18 in a sole proprietorship or in a partnership where every partner is a parent of that child are exempt from Social Security and Medicare taxes.2Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide The exemption covers both the employer and employee shares, a combined 15.3%. Wages paid to a child under 21 in the same structures are also exempt from federal unemployment tax.3Office of the Law Revision Counsel. 26 USC 3306 – Definitions
Corporations Lose the Exemption
If your business is an S-corporation or C-corporation, the exemptions don’t apply. FICA and FUTA hit the child’s wages like any other employee’s, because the corporation, not you personally, is the employer.4Internal Revenue Service. Tax Treatment for Family Members Working in the Family Business You still get the business deduction for the wages, but the payroll tax savings are gone.
Partnerships With Non-Parent Partners
Add a business associate, a sibling, or anyone else who isn’t the child’s parent as a partner, and the FICA and FUTA exemptions disappear. Every partner must be a parent of the child whose wages are at issue.2Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
The LLC Gray Area
Single-member LLCs are a disregarded entity for income tax, which tempts owners to assume they’ll be treated like sole proprietorships for payroll tax too. The IRS guidance in Publication 15 and the family-employment page references sole proprietorships and qualifying partnerships without explicitly addressing LLCs.2Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide The IRS has in some contexts treated the LLC itself as the employer for employment tax purposes, which would knock out the exemption. If you run an LLC, get written professional advice before relying on the parent-employer exemptions. Being wrong means back payroll taxes plus penalties.
What the Work and Wages Have to Look Like
The IRS doesn’t take it on faith that your 12-year-old earned $16,100. Family payroll arrangements get extra scrutiny, and the two things auditors test are whether the work was real and whether the pay was reasonable.
The wages have to be an ordinary and necessary business expense, meaning the kind of task you’d pay someone to do as part of running the business, and the amount has to match what you’d pay a non-family worker for the same job.5Office of the Law Revision Counsel. 26 US Code 162 – Trade or Business Expenses Paying a teenager $50 an hour for filing when the market rate is $15 gets the excess disallowed.
Work that holds up in an audit tends to look like:
- Office and administrative tasks such as data entry, filing, answering phones, and organizing inventory
- Digital tasks such as running social media accounts, updating the website, and editing photos or video
- Physical tasks such as cleaning the office or retail space, stocking shelves, and assembling mailers
- Marketing support such as modeling for product photos, distributing flyers, and helping at events
Household chores do not count. Mowing the family lawn, washing the family car, and babysitting siblings are personal, not business tasks. Putting a child on payroll for work they never performed is the fastest route to losing the deduction and triggering penalties.
Documentation and Payroll Mechanics
The split between a family payroll arrangement that survives an audit and one that gets thrown out almost always comes down to paperwork. Treat your child the same way you’d treat any other hire.
Write a job description for each child on payroll with specific duties, deliverables, and a pay rate. Keep time sheets or work logs that both the child and a supervising parent sign. Save samples of the actual output: screenshots of the social media posts, copies of the spreadsheets, photos of the organized inventory. Pull together market wage data for comparable work in your area so you can show where the hourly rate came from.
Issue a Form W-2 at year end reporting the wages as earned income.6Internal Revenue Service. About Form W-2, Wage and Tax Statement Income tax withholding rules still apply even where FICA and FUTA don’t.4Internal Revenue Service. Tax Treatment for Family Members Working in the Family Business If the child’s wages for the year will stay under the standard deduction, they can file a Form W-4 claiming exemption from withholding so nothing is pulled from each paycheck. The child still files a Form 1040 if gross income exceeds the filing threshold or any federal tax was withheld.
Child Labor Rules You Still Have to Follow
Federal wage and hour law gives parent-owned businesses extra room. A child under 16 working in a non-agricultural business owned solely by their parents can work any hours and at any time of day.7U.S. Department of Labor. FLSA – Child Labor Rules Advisor The scheduling restrictions that apply to minors working for other employers don’t apply here.
The exemption stops at hazardous work. Parents cannot employ their children in manufacturing, mining, or any occupation the Department of Labor has designated hazardous, a list of 17 categories covering explosives, motor vehicle operation, power-driven machinery, roofing, excavation, and demolition, among others.8U.S. Department of Labor. FLSA – Child Labor Rules State child labor laws can impose additional age, permit, or hour restrictions beyond federal rules, and the federal exemption does not override stricter state law. Check with your state labor department before you start.
Turning the Paycheck Into a Roth IRA
Earned income unlocks a Roth IRA for your child. For 2026, the IRA contribution limit is $7,500, or total earned income for the year, whichever is less.9Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 A child who earned $16,100 can contribute up to $7,500 and still keep $8,600 in cash.
Roth beats traditional here. A traditional IRA deduction is worthless to a child whose income is already covered by the standard deduction. Roth contributions go in with after-tax dollars that were effectively untaxed, and the growth and qualified withdrawals come out tax-free decades later. A single $7,500 Roth contribution at 14, left to compound at historical stock market returns for 50-plus years, can grow into several hundred thousand dollars that will never be taxed. The money going in doesn’t have to come from the child’s paycheck; a parent can gift the $7,500 and the child contributes it, as long as the child had at least that much in earned income for the year.
Two Things That Can Still Trip You Up
The Kiddie Tax, which taxes a child’s unearned income above $2,700 at the parent’s rate, does not apply to wages.10Internal Revenue Service. Instructions for Form 8615 – Tax for Certain Children Who Have Unearned Income Wages are earned income and are taxed at the child’s own rates with the full standard deduction. This is why wages work and shifting investment income through dividends from a family corporation doesn’t.
Two outside considerations are worth checking before you commit. State income tax may still apply, because state standard deductions and filing thresholds are often lower than the federal $16,100, and some states don’t mirror the federal FICA and FUTA exemptions. And for families with a college-bound child, FAFSA assesses student income at a higher rate than parent income, so wages that save you tax can shrink need-based aid. A Roth IRA is generally excluded from FAFSA asset calculations, which can soften that tradeoff, but the math is worth running for your own situation.
The dollar figures in this article are the 2026 numbers. The standard deduction, IRA limits, and bracket thresholds all adjust annually, so check the IRS inflation adjustments each fall before setting payroll for the following year.