How Much to Pay Kids Tax-Free From Your Business in 2026
You run a business out of San Diego that clears $480,000 a year. Your 16-year-old spends four hours a week helping after school — organizing client files, setting up social media posts, answering the phone during busy stretches. Right now you pay them in allowance and car insurance, and you feel good about teaching responsibility. But here's what the IRS already lets you do: pay them a real wage, deduct that wage from your business income, and have them owe zero federal income tax on it.
We covered the broad strategy in a separate post on hiring your children as employees, but the question we hear most often is the specific one: how much can you actually pay them tax-free? The answer is the standard deduction — and how you structure the arrangement determines whether it works exactly the way you expect.
The Standard Deduction Makes Child Wages Tax-Free
Every individual who files a federal return gets a standard deduction. For 2026, that number is roughly $15,000 for a single filer. A child who earns less than that amount owes zero federal income tax. At the same time, the business that pays them deducts every dollar as an ordinary and necessary business expense.
That is the fundamental trade working in your favor: the child receives tax-free income, the business lowers its taxable income, and the net result shifts money from a high-tax bracket to a no-tax one.
The IRS does not limit how many children you can employ, so a business owner with two teenagers could shift $30,000 or more out of their taxable income every year this way. The limit is not technical — it is whether the work is real and the wage is reasonable.
What Counts as Reasonable Compensation for a Minor
The single biggest risk with this strategy is paying a child for work they did not actually do. The IRS looks at two things: whether the work serves a genuine business need, and whether the pay matches what you would pay an unrelated person for the same task.
A 10-year-old cannot credibly earn $14,000 for marketing consulting. A 16-year-old who actually manages your business's Instagram account, responds to customer inquiries, organizes digital files, or helps with inventory during the summer can earn a market-rate wage for those tasks. The IRS does not publish a rate card for teenagers, but the standard is the same one that applies to every employee: what would a reasonable employer pay for this work in this market?
Keep a simple time log. Record what the child did, when, and for how long. Pay by check or direct deposit — not by handing over cash or calling it allowance. Issue a W-2 at year end. These steps do not just protect you in an audit; they make the arrangement real for your own purposes.
The same principle applies in a different context when you are the owner paying yourself. We walked through the reasonable compensation rules for an S corp owner in a separate post, and the logic is the same: the wage has to match the work.
The Self-Employment Tax Advantage Most People Miss
Here is where the entity structure of your business changes everything.
If you operate as a sole proprietor or a single-member LLC — meaning you file a Schedule C — a child under 18 who works for you is exempt from Social Security and Medicare taxes. Both the employer half and the employee half. You deduct the full wage, the child reports the income, and nobody pays FICA.
That is a 15.3 percent savings on every dollar you pay them, on top of the income tax savings. For a business owner paying $15,000 to a teenage child, that is roughly $2,300 in tax that simply does not exist.
How Entity Choice Changes the Math
But if you have already made an S corp election, the FICA exemption disappears. An S corp is a separate tax-paying entity, and wages paid to any employee — including the owner's children — are subject to Social Security and Medicare taxes. The corporation pays its half, and the employee's half is withheld. The wage is still deductible, but the total tax cost is higher.
This is the distinction most articles skip. If you are running a profitable business on a Schedule C and considering an S corp election to save on self-employment tax, the timing matters. Making the election before you start employing your children gives up the FICA exemption on their wages. We covered the full picture of when an S corp election makes sense in a previous post, and the child hiring strategy is one more factor in the decision.
For a partnership, the same rule applies: child wages are subject to FICA. Only a sole proprietorship or a single-member LLC owned by one individual gets the exemption for minor children.
Staying Under the Kiddie Tax Threshold
If you pay the child more than the standard deduction, the excess earned income is taxed at the child's own rate — which is still low. But unearned income above $2,500 gets taxed at the parent's marginal rate under the kiddie tax rules.
The practical takeaway: keep the child's wage at or below the standard deduction amount, and make sure every dollar is earned through real work. If the child has investment income from a custodial account, factor that in too, because it eats into the standard deduction space.
Practical Steps for San Diego Business Owners
The setup is straightforward if you know what to do:
First, decide whether the work is real. Make a list of tasks your business actually needs done that a teenager can perform competently — social media scheduling, office organization, data entry, customer follow-up, light bookkeeping assistance during tax season, property staging for a rental, inventory management.
Second, set an hourly rate that matches what an unrelated person would get for the same work in San Diego. Somewhere in the $15 to $25 per hour range is typical for basic office and administrative tasks in 2026.
Third, track the hours and pay on a regular schedule. Issue a W-2 at year end, not a 1099. The IRS expects employees to be classified as employees.
Fourth, run the entity math. If you are on a Schedule C, the FICA exemption on child wages is one reason to stay there past the point where an S corp might otherwise make sense. If you already have an S corp, the strategy still works — it just costs more in payroll tax.
Alongside this and the other deductions San Diego business owners routinely miss, hiring your children is one of the few strategies that shifts income between tax brackets without triggering a complex restructuring. It fits into a larger picture of strategies that work together for the business owner who wants to keep more of what they earn.
The difference between a preparer who files in April and a strategist who designs the outcome before the year closes matters here. A preparer sees a W-2 for a 16-year-old and enters it. A strategist looks at the full picture — entity choice, the FICA math, the kiddie tax, the total tax impact across all the strategies that apply — and decides where each piece fits before December 31.
If you are a San Diego business owner clearing $300,000 or more and have never run the numbers on hiring your children, call us at (619) 280-2700 or email info@RoadmapTax.com to book a free 15-minute discovery call. We will look at your entity structure, your children's ages, and the work your business actually needs — and tell you straight whether the math works for your situation.
FAQ
How much can I pay my child tax-free from my business in 2026?
A child can earn up to the standard deduction amount — roughly $15,000 for a single filer in 2026 — without owing federal income tax. The business deducts the full amount as a wage expense.
Does my child have to pay Social Security and Medicare tax on wages from my business?
If you operate as a sole proprietor or single-member LLC, a child under 18 is exempt from both the employer and employee halves of Social Security and Medicare tax. If you operate as an S corp or partnership, the wages are subject to FICA.
What kind of work can my child do for my business?
Any genuine business task that a minor can perform competently: social media management, office organization, data entry, customer follow-up, light bookkeeping, inventory management, property staging, or seasonal help. The work must serve a real business need.
Can I pay multiple children from my business?
Yes. There is no limit on how many children you can employ, as long as each child performs real work and is paid a reasonable wage for it. A business owner with two teenagers could shift $30,000 or more out of their taxable income every year.
What happens if I pay my child more than the standard deduction?
The earned income above the standard deduction is taxed at the child's own rate, which is still low. However, unearned income above $2,500 is taxed at your marginal rate under the kiddie tax rules, so keep wages within the standard deduction and minimize unearned income.
Does hiring my child trigger any additional paperwork?
Yes. You should keep a time log, pay by check or direct deposit, and issue a W-2 at year end. The child is an employee, not an independent contractor, so you need an employer identification number and should follow standard payroll procedures.
