The “Hire Your Kid” Rule: Pay Your Child $15,000 From the Family Business and Neither of You Owes the IRS a Dime
A section of the tax code that most business owners never read lets a family business owner legally route money to a minor child and wipe out the federal tax bill for both of them before it ever exists.
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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 strip every dollar of federal income tax and payroll tax off the top. Pay your child $15,000 to do real work in the business, and neither of you owes the IRS a dime 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 most business owners never bother to read.
The Buried Benefit
The math is straightforward. Wages you pay your child count as a deductible business expense, so the money exits your Schedule C before self-employment tax or income tax can touch it. On your child’s side, earned income up to the single-filer standard deduction ($16,100 for tax year 2026) eliminates 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 from your own bracket into your kid’s zero bracket, and payroll tax never enters the picture.
Where the Rule Actually Lives
Three code sections do the heavy lifting 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). Your 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. And if any partner in a partnership is not a parent of the child, the exemption vanishes entirely.
How to Actually Do It in 2026
- 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.
- 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.
- 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.
- 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.
- 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 and begin compounding decades of tax-free growth on money that was never taxed in the first place.
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. So 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 article was updated to reflect the 2026 Roth IRA contribution limit of $7,500 (confirmed by Vanguard and Charles Schwab) and to specify that the One Big Beautiful Bill Act was signed into law on July 4, 2025.
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