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 hire your kid tax strategies still on the books 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 are an ordinary and necessary business expense, just like rent or software. They come off your business income before self-employment tax. On your child’s side, the first $16,100 of earned income in 2026 is wiped out by the single-filer standard deduction. Stop at $15,000 and you leave a cushion. 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, and wages paid to a child under 21 are exempt from federal unemployment tax.
The Rule, by Section Number
The FICA exemption lives in 26 U.S. Code §3121(b)(3)(A). The FUTA exemption is 26 U.S. Code §3306(c)(5). The 2026 standard deduction of $16,100 for single filers comes from Revenue Procedure 2025-32, released after the One, Big, Beautiful Bill locked in the higher deduction amounts. IRS Publication 15 (Circular E) spells out the family-employee payroll rules in plain English.
Who Qualifies, and Who Gets Shut Out
This works if 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 mom and dad. It does not work the same way if you run an S-corporation or C-corporation. Corporations must withhold and pay FICA on a child’s wages, even if you own 100% of the stock. The income-tax side still helps, but you lose the payroll-tax exemption. Your child also has to be a real employee doing real, age-appropriate work: filing, shredding, cleaning the office, modeling for the website, running deliveries. No ghost jobs.
Running It the Right Way
- Assign a legitimate job description and track hours on a timesheet.
- Pay a reasonable wage for the work. The federal minimum wage of $7.25 per hour is the floor, but market rate is what the IRS actually tests against. A 12-year-old cannot bill $200 an hour to alphabetize invoices.
- Get an EIN if you do not have one, and register for state payroll if your state requires it.
- Cut the paycheck from the business account to a bank account in the child’s name. Do not cash it and hand them $20.
- Issue a W-2 in January and file it with the Social Security Administration.
- Have the child file a return if income exceeds the standard deduction or if withholding was taken. At $15,000 with no withholding, a return is generally not required, but filing one closes the loop cleanly.
Bonus move: because your kid now has earned income, you can fund a Roth IRA in their name up to the wage amount, capped at the annual IRA limit. Decades of compounding, seeded by a tax deduction you already took.
The Catch That Blows Up the Strategy
Entity type is the trap. If you run the business through an S-corp for the QBI or salary-vs-distribution benefit, the FICA exemption vanishes. Some owners solve this by running a separate sole-prop family management company that employs the kids and bills the S-corp, but that structure has to be genuine and documented. Two more gotchas: state income tax may still apply, since not every state mirrors the federal standard deduction, and the “kiddie tax” does not touch earned income but will hammer any investment income your child racks up above $2,700 in 2026. Keep the work real, the pay reasonable, and the paper trail boring. The IRS rewards boring, well-documented payroll registers that actually balance.
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