The “Hire Your Kid” Rule: Pay Your Child $15,000 From the Family Business and Neither of You Owes the IRS a Dime

Michael Williams

Wed, July 29, 2026 at 7:32 PM GMT+3 5 min read

Quick Read

Pay your child up to $16,100 from your sole proprietorship in 2026, and neither of you owes federal income tax or payroll tax on those wages.
S-corp and C-corp owners lose the FICA exemption entirely, owing the full 15.3% payroll tax, while only sole props and parent-only partnerships qualify for it.
Those earned wages unlock Roth IRA eligibility for your child, letting them start decades of tax-free compounding growth from an early age.
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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 kid $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 hides in plain sight inside two sections of the tax code most business owners never read.

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The Buried Benefit

Here is how the math works. Wages you pay your child are a deductible business expense, so the money leaves your Schedule C before self-employment tax and income tax touch 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. And if your child is under 18 and you operate as a sole prop or a partnership owned only by the child's parents, the wages are also exempt from Social Security, Medicare, and federal unemployment tax. You shift income from your bracket to your kid's zero bracket, and payroll tax never enters the picture.

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Where the Rule Actually Lives

The FICA exemption sits in IRC Section 3121(b)(3)(A), which excludes from "employment" any service performed by a child under 18 in the employ of a parent. The FUTA (unemployment) exemption for children under 21 sits in IRC Section 3306(c)(5). The wage deduction on your side runs through IRC Section 162 as an ordinary and necessary business expense, so long as the pay is reasonable for the work. The standard deduction figure comes from the IRS 2026 inflation adjustments under Revenue Procedure 2025-32, updated by the One, Big, Beautiful Bill signed into law in 2025.

Who Qualifies, Who Does Not

You qualify if your business is a sole proprietorship, a single-member LLC taxed as a sole prop, or a partnership where every partner is a parent of the child. Your child must be under 18 for the FICA break and under 21 for the FUTA break. You do not qualify if your business is an S-corporation, a C-corporation, or an LLC taxed as either. Corporate structures owe full payroll tax on the child's wages, though the income-tax shelter still works. If both parents are not the only partners, the exemption also disappears.

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 inventory counts all count. The work must be age appropriate and actually performed.
Set a reasonable wage. Pay what you would pay a stranger for the same task. A 9 year old doing an hour of filing is not worth $50 an hour.
Document everything. Keep a timesheet, a written job description, and a copy of each check. Pay from the business account into an account in the child's name.
Run payroll. Issue a W-2 in January. Withhold nothing if wages stay under $16,100. File Form 941 (or 944) marking the child's wages exempt from Social Security and Medicare where allowed.
Stack a Roth IRA. Earned income unlocks a Roth. Your kid can contribute up to the annual limit and start compounding decades of tax-free growth.

The Catch That Trips People Up

The IRS audits sham arrangements aggressively, and the tax court has thrown out deductions where the child did no real work, where records were reconstructed after the fact, or where the pay wildly exceeded market rate. A toddler on the payroll is a red flag. So is $15,000 for a few hours of chores. Two more traps: if your business is an S-corp or C-corp, the FICA exemption evaporates and you owe the full 15.3% payroll tax on those wages. And state income tax rules do not always mirror the federal standard deduction, so your child could still owe state tax depending on where you live. Run the payroll cleanly, keep the paperwork, and the loophole holds.

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