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 run a family business as a sole proprietorship or a spouse-only partnership, the tax code lets you move up to $16,100 onto your minor child’s W-2 in 2026 and legally eliminate every dollar of federal income tax and payroll tax before it ever accrues. Pay your child $15,000 to do real work in the business, and neither of you owes the IRS anything on those wages. The strategy is called the “hire your kid” rule, and it sits in plain sight inside two sections of the tax code that most business owners never bother to read.

The Buried Benefit

The math is remarkably straightforward. Wages you pay your child count as a deductible business expense, so the money leaves your Schedule C before self-employment tax or income tax can reach it. On your child’s side, earned income up to the single-filer standard deduction ($16,100 for tax year 2026) wipes out federal income tax entirely. Better still, if your child is under 18 and you operate as a sole proprietorship or a partnership owned solely by the child’s parents, those wages are also exempt from Social Security, Medicare, and federal unemployment tax. The result: you shift income out of your own bracket and into your child’s zero bracket, with payroll tax never entering the picture at all.

Where the Rule Actually Lives

Three code sections carry the weight here. The FICA exemption sits in IRC Section 3121(b)(3)(A), which excludes from “employment” any service a child under 18 performs for a parent. The FUTA (unemployment tax) exemption for children under 21 lives in IRC Section 3306(c)(5). The deduction on the business side flows through IRC Section 162 as an ordinary and necessary business expense, provided the pay is reasonable for the actual work performed. The $16,100 standard deduction figure comes from Revenue Procedure 2025-32, the IRS’s official 2026 inflation-adjustment publication, as updated by the One Big Beautiful Bill Act signed into law on July 4, 2025.

Who Qualifies, Who Does Not

The payroll-tax exemption is available to owners of a sole proprietorship, a single-member LLC taxed as a sole prop, or a partnership where every partner is a parent of the child. The age thresholds matter: your child must be under 18 for the FICA break and under 21 for the FUTA break. Corporate structures, including S-corporations, C-corporations, and LLCs taxed as either, owe full payroll tax on the child’s wages. The income-tax shelter still works inside those entities, but the payroll savings disappear entirely. And if any partner in a partnership is not a parent of the child, the exemption vanishes.

How to Actually Do It in 2026

1. Give your child a real job. Filing, shredding, cleaning the office, modeling for marketing photos, running social media, and counting inventory all qualify. The work must be age appropriate and genuinely performed.
2. Set a reasonable wage. Pay what you would pay an outside worker for the same task. A 9-year-old doing an hour of filing is not worth $50 an hour, and the IRS will notice if you treat it that way.
3. Document everything. Keep a timesheet, a written job description, and copies of every check. Always pay from the business account directly into an account in the child’s name.
4. Run payroll properly. Issue a W-2 in January. If wages stay under $16,100, no federal income tax withholding is required. File Form 941 (or 944) and mark the child’s wages as exempt from Social Security and Medicare taxes where the exemption applies.
5. Stack a Roth IRA. Earned income unlocks IRA eligibility at any age. In 2026, your child can contribute up to $7,500 to a Roth IRA, an increase from the $7,000 limit that applied in both 2024 and 2025. That opens decades of tax-free compounding on money that was never taxed in the first place.

A New Planning Layer: Trump Accounts

The One Big Beautiful Bill Act added another tool worth knowing about. Beginning January 1, 2026, children under 18 are eligible for a new tax-advantaged savings vehicle informally called a Trump Account, a type of starter individual retirement account. The government seeds these accounts with a one-time $1,000 contribution for eligible children born between January 1, 2025, and December 31, 2028. Parents, relatives, and employers can then contribute up to $5,000 per year on the child’s behalf. Critically, Trump Accounts do not affect the contribution limits for traditional or Roth IRAs, so a working child can hold both simultaneously. A child earning wages through the “hire your kid” strategy could, in theory, fund a Roth IRA up to the earned-income limit and still receive Trump Account contributions from family members, stacking two separate tax-advantaged vehicles at once.

The Catch That Trips People Up

The IRS audits sham arrangements aggressively. Tax courts have thrown out deductions where the child performed no real work, where records were reconstructed after the fact, or where the pay far exceeded any reasonable market rate. A toddler on the payroll is an immediate red flag, as is a $15,000 payment for what amounts to a few hours of household chores.

Two additional traps are worth flagging. First, if your business is an S-corp or C-corp, the FICA exemption evaporates and you owe the full 15.3% payroll tax on every dollar of those wages. Second, state income tax rules do not always mirror the federal standard deduction, so your child could still face a state tax bill depending on where you live. Keep the records clean, pay a defensible rate, and the strategy holds up.

Editor’s note: This pass added a new section on the Trump Account savings vehicle created by the One Big Beautiful Bill Act, which allows up to $5,000 in annual contributions for children under 18 and can be stacked alongside a Roth IRA for families using the “hire your kid” strategy. The 2026 Roth IRA contribution limit of $7,500 is noted as an increase from the $7,000 limit in effect for 2024 and 2025.

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