Hiring Your Children: How Business Owners Cut Taxes and Start a Family Legacy

You run a business that clears $480,000 a year. You file on Schedule C, pay the full 15.3% self-employment tax on every dollar of profit, and you have a 16-year-old who spends three hours a week helping around the business sorting paperwork, entering data, or organizing inventory. You pay her nothing because she is your daughter and that is what family does. And every year, you leave a legal, straightforward tax savings on the table.

Here is the strategy that most family-owned businesses never set up, and why you should consider it before the year closes.

Why hiring your own children works

The core mechanism is simple and entirely legal. When you hire your child to perform real work for your business, their wages become a deductible business expense. That dollar moves from your taxable income (where it was being taxed at your marginal rate plus self-employment tax) to your child's income, where it is taxed at their rate.

For 2026, the standard deduction for a dependent is $14,600. That means your child can earn up to $14,600 in wages and owe zero federal income tax on it. The business gets the deduction at your rate. The child pays nothing. The family keeps the difference.

A business owner in the 32% bracket saves roughly $4,600 in federal income tax on that $14,600, plus the self-employment tax savings. The math works because you are shifting income from a high bracket to a zero bracket, using wages for work your child is actually doing.

The under-18 advantage most owners miss

This is the part that catches people by surprise. When your child works for your sole proprietorship or single-member LLC (taxed as a sole prop) and is under 18, their wages are exempt from Social Security and Medicare taxes entirely. No 6.2% Social Security withheld, no 1.45% Medicare withheld, and no matching 7.65% on the employer side.

If you hired a non-family employee to do the same work, you would pay an extra 7.65% on top of their wages, and they would pay 7.65% out of theirs. When you hire your own minor child, that 15.3% combined tax simply does not apply.

There is an important distinction here. This exemption works for sole proprietorships and partnerships where the child is working for a parent. It does not apply to S corps or C corps, where the child's wages are subject to FICA regardless of age. If you run your business through an S corp (how to set reasonable compensation is its own topic), the strategy still works for income shifting, but that extra 15.3% exemption is not available.

The Roth IRA that starts decades early

Every dollar your child earns in wages can go into a Roth IRA, up to the annual contribution limit or their earned income, whichever is lower. For 2026, the under-50 contribution limit is $7,000.

Consider what that means. A 16-year-old who earns $7,000 working for the family business can put that entire amount into a Roth IRA. That money grows tax-free and comes out tax-free in retirement. With 40-plus years of compounding, that single year's contribution could grow into a meaningful retirement start.

Many parents fund the Roth IRA from their own cash as an additional gift, then take the business deduction for the wages they paid. The structure is: pay the child $7,000 in wages (deductible), the child puts $7,000 into a Roth IRA (funded by the parent or from the child's wages), and the family gets the deduction while the child starts a retirement account decades before their peers.

What the IRS expects from you

The strategy is straightforward, but the documentation matters. The IRS has seen every version of this setup, and the rules exist for a reason.

The work must be real. Your child needs an actual role with genuine tasks. Filing, data entry, inventory organization, cleaning a workshop, managing a social media calendar for the business. The work does not need to be full-time, but it needs to be honest.

The pay must be reasonable. What would you pay a non-family member to do the same job? That is the number. Not more, and not significantly less. Paying your 14-year-old $50,000 a year to sweep the floor is not reasonable. Paying your 16-year-old $14,000 to handle data entry and filing for several hours a week is fine.

Keep a simple record. A time log, a few notes about what was done each week, and a clear paper trail for payments. This does not need to be elaborate, but it needs to exist if the IRS ever asks.

Run payroll properly. Issue a W-2 at year end. Pay the wages on a regular schedule through your payroll system or a separate check. Treat your child the same way you would treat any other employee for documentation purposes.

One more note on the kiddie tax. The kiddie tax applies to a child's unearned income (investment income, capital gains) above a certain threshold. It does not apply to wages earned from work. So your child's wages from the family business are taxed at their rate, not yours. This is an important distinction that makes the strategy work.

What this looks like in practice

A business owner in San Diego running a profitable consulting practice. She pays herself $480,000 through her single-member LLC. She hires her 17-year-old son to manage the company's social media presence, update the website with blog posts, and organize digital files. She pays him $13,000 for the year, which is reasonable for that scope of work.

The business deducts the $13,000 as a wage expense, saving roughly $2,080 in income tax at the 32% federal rate plus state tax savings. No FICA is owed because he is under 18 and the business is a sole prop. He files a return showing $13,000 in wages, owes zero federal tax because the standard deduction covers it, and uses $7,000 of his earnings to open and fund a Roth IRA.

That is one year. Do it for four years of high school and four more of college, and the structure has shifted significant income to a lower bracket, built a tax-free retirement account for a young adult, and done it entirely within the rules.

A few thresholds to keep in mind. The kiddie tax threshold for unearned income is roughly $2,600 for 2026, but again this applies only to unearned income, not wages. If your child has investment accounts generating significant income, that is a separate conversation. The $14,600 standard deduction applies to their total income (if they have other jobs, that space gets used up faster). And if you run through an S corp, you lose the FICA exemption but keep the income-shifting benefit.

Is this right for your business?

Hiring your children is not a strategy for every business owner. It works best when you have a genuine sole proprietorship or partnership with tasks a teenager or young adult can perform, the income level to make the deduction meaningful, and a willingness to run proper payroll and keep records.

If that describes your situation, the best time to set this up is before the end of the year. Payroll needs to be running, the work needs to be real, and the documentation belongs in place ahead of time, not retroactively.

FAQ

Can I hire my child and deduct their wages on my taxes?

Yes. Wages paid to your child for real work performed for your business are a legitimate business expense, just like wages paid to any other employee. The work must be genuine and the pay must be reasonable for the tasks performed.

How much can I pay my child tax-free in 2026?

Your child can earn up to the standard deduction amount ($14,600 for 2026) and owe zero federal income tax on those wages. The business still deducts the full amount as a wage expense.

Do I have to pay payroll taxes on my child's wages?

If your child is under 18 and works for your sole proprietorship or single-member LLC, their wages are exempt from Social Security and Medicare taxes. If you operate as an S corp or C corp, those taxes apply regardless of age.

What if my child is over 18?

The FICA exemption ends at 18, so payroll taxes apply. But the income-shifting benefit remains: wages are still deductible by the business and taxed at your child's lower rate up to the standard deduction.

Does the kiddie tax apply to wages from the family business?

No. The kiddie tax applies only to unearned income such as investment returns and capital gains. Wages earned from work are taxed at your child's marginal rate, not yours.

What kind of work does my child need to do?

The work must be legitimate and age-appropriate. Filing, data entry, inventory management, social media assistance, cleaning a workshop, organizing supplies. Any task you would pay a non-family employee to handle.