The “Hire Your Kid” Rule: Pay Your Child $15,000 From the Family Business and Neither of You Owes the IRS a Dime

If you own a family business, or even a side hustle taxed on Schedule C, you can legally move up to $16,100 off your tax return this year by putting your kid on payroll. That is the “hire your child” rule, and it is one of the cleanest income-shifting strategies still available to small business owners in 2026. Pay your child $15,000 for real work in the business, and if that is their only income, they owe zero federal income tax. You deduct every dollar. Neither of you writes a check to the IRS.

The Buried Benefit in Your Schedule C

Wages paid to your child count as an ordinary and necessary business expense, just like rent or software. They come off your business income before self-employment tax is calculated. On your child’s side, the first $16,100 of earned income in 2026 is sheltered by the single-filer standard deduction, a figure that was elevated and made permanent by the One Big Beautiful Bill Act (OBBBA). Stop at $15,000 and you leave a comfortable cushion below that threshold.

Better still, if your business is a sole proprietorship or a partnership owned only by both parents, wages paid to a child under 18 are exempt from Social Security and Medicare tax entirely. Wages paid to a child under 21 are also exempt from federal unemployment tax. Those exemptions stack on top of the income-tax savings, which is what makes this strategy genuinely valuable rather than merely convenient.

The Rule, by Section Number

The FICA exemption lives in 26 U.S. Code §3121(b)(3)(A). The FUTA exemption is in 26 U.S. Code §3306(c)(5). The 2026 standard deduction of $16,100 for single filers comes from Revenue Procedure 2025-32, confirmed after the OBBBA locked in the higher deduction amounts. IRS Publication 15 (Circular E) spells out the family-employee payroll rules in plain English for anyone who wants the primary source.

Who Qualifies, and Who Gets Shut Out

This strategy works when your business is a sole proprietorship, a single-member LLC taxed as a sole prop, or a partnership where the only partners are the child’s parents. S-corporations and C-corporations are a different story. Corporate entities must withhold and pay FICA on a child’s wages regardless of ownership structure, so the payroll-tax exemption disappears the moment you incorporate. The income-tax deduction still applies, but it is the smaller half of the combined benefit.

Your child also has to be a real employee doing real, age-appropriate work: filing documents, shredding, cleaning the office, modeling products for the website, running deliveries. The IRS tests both the legitimacy of the work and the reasonableness of the wage rate. A 12-year-old cannot invoice the business $200 an hour to alphabetize invoices.

Running It the Right Way

The mechanics matter as much as the tax code. Follow these steps to keep the strategy audit-proof:

1. Assign a legitimate job description and track hours on a timesheet kept alongside other business records.
2. Pay a reasonable wage for the work. The federal minimum wage of $7.25 per hour is the legal floor, but market rate for the actual task is the IRS’s real test.
3. Obtain an EIN if you do not already have one, and register for state payroll wherever your state requires it.
4. Cut each paycheck from the business bank account directly to a bank account in the child’s name. Handing over cash does not establish the paper trail the IRS expects to see.
5. Issue a W-2 in January and file it with the Social Security Administration on time. The W-2 is the document that proves a genuine employment relationship existed.
6. Have the child file a return if income exceeds the standard deduction or if any withholding was taken. At $15,000 with no withholding, filing is generally not required, but doing so closes the loop and creates a clean record.

There is a notable bonus built into this arrangement. Because your child now has earned income, you can fund a Roth IRA in their name up to the amount of their wages, subject to the 2026 annual IRA contribution limit of $7,500. Decades of tax-free compounding, seeded by a business deduction you already took on your own return.

The Catch That Blows Up the Strategy

Entity type is the primary trap. Running the business through an S-corp for the qualified business income deduction or salary-vs-distribution benefit eliminates the FICA exemption on wages paid to your children. Some owners address this by establishing a separate sole-prop family management company that employs the children and bills the S-corp for services, but that structure has to be genuine, separately capitalized, and thoroughly documented to survive scrutiny.

Two other pitfalls deserve attention. First, state income tax may still apply, since many states do not mirror the federal standard deduction in either amount or structure. Second, the kiddie tax does not touch earned wages at all, but it will apply the parents’ marginal rate to any investment income your child accumulates above $2,700 in 2026. The two risks are separate, and each needs its own planning conversation. Keep the work real, the pay reasonable, and the paper trail meticulous. The IRS rewards straightforward, well-documented payroll registers far more often than it rewards creative structures.

Editor’s note: This article was updated to add the 2026 Roth IRA contribution limit of $7,500 and to note that the OBBBA made the elevated standard deduction permanent, context that was not reflected in the original version.

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