Pay your kids reasonable wages for real work and their 2026 standard deduction shelters up to $16,100 at a 0% rate — plus a FICA exemption for under-18s in a parent's sole prop.
Hiring your children in your business is one of the few income-shifting strategies the tax code openly blesses — if the work is real and the wages are reasonable. The core math: wages you pay your child are deductible to your business at your marginal rate, while the child's own standard deduction shelters up to $16,100 of wages in 2026 at a 0% federal rate. Income moves from your bracket to nothing. And if your business is a parent-owned sole proprietorship or a spouses-only partnership, wages paid to your under-18 child are exempt from FICA entirely.
Done right, this is legitimate family payroll. Done the influencer way — $12,000 to a toddler for "modeling" — it's a disallowed deduction plus penalties. This post covers the mechanics, the entity wrinkles, and the documentation. It sits alongside the equipment and property strategies in our bonus depreciation and Section 179 playbook as a core year-round planning move for owners.
Say you're in a 32% combined federal bracket and you pay your 15-year-old $12,000 in 2026 for genuinely useful work:
Net effect: about $3,840 stays in the family instead of going to the IRS, every year, per child — and the child ends up with earned income, which unlocks the next move.
The IRS respects family wages only when an unrelated employer would have plausibly paid the same money for the same work. That means:
Children under 18 employed by their parent's sole proprietorship or a partnership owned only by the two parents are exempt from FICA. That includes a single-member LLC taxed as a sole proprietorship. If you and your spouse co-own the business, the spouses-only partnership qualifies — and if you're sorting out how a husband-wife LLC files in the first place, our guide to husband-wife LLC taxes and the qualified joint venture covers it.
S corporations don't get the exemption. A corporation is not a parent, so an S corp (or C corp) owes FICA on a child's wages like any employee's. The strategy still works — the income shift to the child's 0% bracket survives — it's just less rich. Some advisors set up a family management company: a parent-owned sole proprietorship that provides admin services to the S corp, employs the kids, and preserves the FICA exemption. That's an advanced structure that needs real substance (actual services, contracts, its own books) and professional setup — flag it with your advisor rather than DIY-ing it.
Wages give your child earned income, and earned income unlocks a Roth IRA. A custodial Roth funded with a few thousand dollars a year of legitimately earned wages, starting in the teens, compounds tax-free for five-plus decades. There's no better long-run pairing: the business deducts the wage, the child pays 0% on it, and the money grows tax-free for retirement. Families using this strategy often coordinate it with their own small business retirement plans so the whole household is sheltering income at once.
Every family-employment case the IRS wins comes down to missing paperwork. Build the file:
A common worry that isn't a problem: the kiddie tax. That regime taxes a child's unearned income — interest, dividends, gains — at higher rates, but wages are earned income and stay outside it. Legitimately earned pay is sheltered by the child's own standard deduction regardless of the parents' bracket. Note also that paying your child doesn't cost you their dependency status; a qualifying child can earn wages and remain your dependent as long as they don't provide more than half of their own support.
The test is simple: would you pay a stranger this much for this work, and can you prove the work happened? If yes to both, the strategy holds.
Paying your kids reasonable wages for real work shifts income from your bracket to their 0% bracket — up to $16,100 each in 2026 — with a FICA exemption for under-18s in a parent's sole prop or spouses-only partnership, and a custodial Roth as the compounding kicker. The whole strategy stands or falls on job descriptions, timesheets, market rates, and actual payment. Taxagon's CPAs and EAs set up compliant family payroll as part of tax planning engagements every year — if you'd rather not navigate it alone, reach out.
This article is general information, not tax advice for your specific situation. Tax law changes; figures are for the years stated.
Talk it through with a licensed US tax professional — we'll tell you honestly whether it applies to your situation.
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