Hire Your Kids and Pay Less Tax: FICA and FUTA Exemptions, the Standard-Deduction Pay Target, and the Records That Survive an Audit

Every dollar of profit your business earns this year will be taxed at your marginal rate — likely 22, 24, or 32 percent federal, plus self-employment tax on top. But a dollar of that same profit, paid as legitimate wages to your child, can be taxed at zero percent instead. Not deferred. Not sheltered in a complex structure. Zero, by operation of two of the oldest family-employment rules in the tax code.

This is not a loophole someone discovered last week. The IRS publishes the rules on its family employees page for anyone to read. Yet most eligible business owners either never hear about the strategy or get one critical detail wrong — usually the entity-type requirement — and leave thousands of dollars on the table every year. Here is how the strategy works, who qualifies, the exact 2026 pay target, and the paper trail that keeps the deduction safe in an audit.

Why Shifting Income to Your Child Saves So Much​

The strategy rests on a simple observation: your family pays less total tax when income lands in the hands of the member in the lowest bracket. Consider a sole proprietor in the 24 percent bracket paying a teenager $10,000 in legitimate wages for real work:

• Your side: the $10,000 is an ordinary business expense. It reduces your income tax by about $2,400 and your self-employment tax by about $1,413 — roughly $3,800 in total savings.
• Your child's side: the $10,000 is wage income covered entirely by the standard deduction, so the federal income tax bill is $0. And, as explained below, no Social Security, Medicare, or unemployment tax is owed either.

That is nearly $3,800 of real savings on $10,000 of wages — money that stays inside your household instead of going to the Treasury. Scale the wages to the full 2026 pay target discussed below and the annual savings can exceed $6,000 per child. The catch, and it is a manageable one, is that every requirement must be met exactly: the right entity, the right ages, real work, reasonable pay, and clean records.

The Two Payroll Tax Exemptions That Do the Heavy Lifting​

Wages you pay your own child get special employment-tax treatment, but only when the business is a sole proprietorship owned by the parent or a partnership in which each partner is a parent of the child. A single-member LLC that is disregarded for tax purposes counts as a sole proprietorship here, so it qualifies.

When the entity test is met, two exemptions apply:

• No Social Security or Medicare tax (FICA) on wages paid to a child under age 18. Both the employer's 7.65 percent share and the employee's 7.65 percent share disappear — a combined 15.3 percent saving on every dollar.
• No federal unemployment tax (FUTA) on wages paid to a child under age 21. The standard FUTA rate is 6 percent on the first $7,000 of wages per employee (with most employers claiming a 5.4 percent credit for paying state unemployment tax on time, leaving an effective 0.6 percent) — and none of it applies here.

Note the asymmetry: from 18 through 20, the child's wages become subject to FICA but remain exempt from FUTA. At 21, both exemptions end.

The Corporation Exception That Trips Everyone Up​

If the business is a corporation — including an S corporation — a partnership with any non-parent partner, or an estate, none of this applies. Wages paid to your child are treated like wages paid to any other employee: full income tax withholding, full FICA, full FUTA. The exemption is written narrowly and the IRS applies it literally. Entity choice alone is the difference between a $6,000 annual benefit and an ordinary payroll run, so confirm your tax classification before paying a single paycheck.

S corporation owners sometimes ask about running the child's wages through a separate family management company organized as a sole proprietorship. That structure can work when the management company is a genuine business performing real services for a real fee — but it adds entity maintenance, intercompany agreements, and scrutiny. Get professional advice before building an entity for this purpose alone.

The 2026 Pay Target: Up to $16,100 at a Zero Percent Rate​

The payroll-tax exemptions eliminate FICA and FUTA. The standard deduction eliminates the child's federal income tax. For 2026, the IRS raised the single-filer standard deduction to $16,100. A dependent child with only wage income can use up to the full amount: the dependent standard deduction equals earned income plus $450 (with a $1,350 floor), capped at the $16,100 basic standard deduction. In practice, a child earning $15,650 or more in wages gets the full $16,100 deduction.

The arithmetic is straightforward:

• Pay your child $16,100 or less in 2026 wages, and the child's federal taxable income is $0.
• You still deduct the full $16,100 against income that would otherwise be taxed at your top marginal rate plus self-employment tax.

At a combined marginal rate of roughly 37 percent (24 percent income tax plus 15.3 percent self-employment tax, adjusted for the deductible half of self-employment tax), shifting the full $16,100 saves a household on the order of $5,500 to $6,000 in a single year — per child, since each child gets their own standard deduction.

Two guardrails apply. First, the wages must still be reasonable for the work performed; the pay target is a ceiling set by the tax code, not a permission slip to pay a seven-year-old a full salary. Second, this analysis covers federal tax. States have their own withholding thresholds, unemployment insurance rules, and child-labor laws, and some do not mirror the federal exemptions — check your state's requirements before assuming the wages are state-tax-free too.

What Counts as Real Work at a Reasonable Wage​

The IRS does not publish a list of approved jobs for children, and it does not need to. The test auditors apply is the same one they apply to any employee: was the work genuine, and was the pay what you would have paid a non-family worker for the same job? If you can answer yes to both with documents to prove it, the deduction stands.

Age-appropriate work that commonly passes this test includes:

• Young children (roughly 7 and up): modeling for the business website and ad photos, appearing in marketing videos, stuffing envelopes, shredding, simple filing and cleanup.
• Preteens and teens: data entry, scanning receipts, social media assistance, basic bookkeeping support, inventory counts, cleaning the office or shop, lawn and lot maintenance, customer-survey calls.
• Older teens: website updates, photography and video editing, delivery driving (with a valid license), bookkeeping, junior administrative work.

Reasonable pay means market pay. A teenager doing $15-an-hour office cleanup work at 10 hours a week over a summer earns roughly $1,800 — defensible. That same teenager paid $16,100 for a handful of photo shoots is not, unless you can show what a commercial modeling engagement actually costs. Benchmark the wage against local postings for comparable work, keep the posting or rate sheet in your files, and pay by the hour or by the project — never a round-number "salary" disconnected from hours worked.

Also respect child-labor law. Federal rules under the Fair Labor Standards Act restrict hours and hazardous tasks for workers under 16, with an exception for children employed by a parent in non-hazardous, non-manufacturing, non-mining work — but states often add their own permits and hour limits. The tax strategy never overrides labor law.

The Paper Trail That Survives an Audit​

Family employment draws attention precisely because the parties are related, so your documentation should be better than what you keep for anyone else. Set your child up exactly like a regular employee:

1. Get an employer identification number (EIN) if you do not already have one, and put the child on the payroll properly.
2. Complete Form W-4 and Form I-9 like any new hire. Income tax withholding technically applies to a child's wages regardless of age, but a child who owed no tax last year and expects to owe none this year can claim exempt on the W-4.
3. Write a simple job description stating duties, hourly rate or project rate, and schedule — signed and dated before work begins.
4. Track hours contemporaneously. A weekly timesheet, signed by you and your child, is the single most persuasive document in an audit. Reconstructed logs written the night before an IRS appointment are the least.
5. Pay by check or bank transfer into an account in the child's name — never cash with no receipt. The money must actually belong to the child; routing it straight back to household bills undermines the entire arrangement.
6. File Form W-2 at year end and the applicable employment-tax returns (Form 941 or annual Form 944, and Schedule H or Form 940 considerations where relevant). Exempt from the tax does not mean exempt from the paperwork.
7. File a tax return for the child when required, claiming the standard deduction. Even when no return is strictly required, filing one documents the position and starts the statute of limitations.

One more distinction worth keeping straight: the "kiddie tax" applies to a child's unearned income such as dividends and capital gains — it does not touch legitimate earned wages. Paying wages cannot trigger it.

The Bonus Move: Turn Wages Into a Roth IRA Head Start​

Wages give your child something allowance money never can: earned income, which makes the child eligible to contribute to a Roth IRA. A teenager who earns $6,000 working in the family business can contribute up to $6,000 (subject to that year's IRA limit) to a Roth, where it compounds tax-free for decades. A single $6,000 contribution at age 16, growing at 8 percent annually, is worth over $280,000 by age 65 — all withdrawable tax-free in retirement.

This compounds the strategy's value enormously: you deduct the wages at your high marginal rate today, the child pays no tax on them, and the same dollars begin a lifetime of tax-free growth. If your family can afford to have the child save rather than spend the paycheck, pairing the wages with a Roth contribution is the highest-value version of this plan.

Five Mistakes That Blow Up the Strategy​

1. Paying the child through an S corporation or C corporation. The exemptions vanish. Either accept ordinary payroll treatment or restructure deliberately with counsel — do not assume the sole-proprietor rules carry over.
2. Paying an unreasonable wage. Above-market pay is not deductible, and an obviously inflated salary invites the auditor to disallow the whole arrangement rather than just the excess.
3. Skipping the paperwork. No timesheets, no W-2, cash payments with no trail — each missing record converts a clean deduction into an argument you have to win without evidence.
4. Forgetting state obligations. State income tax withholding, state unemployment insurance, workers' compensation, and work permits all operate on separate tracks from the federal rules. Some states tax the wages even when the federal bill is zero.
5. Paying for household chores. Mowing the family lawn and babysitting siblings are not business expenses. The work must serve the trade or business, and the business must be the one paying.

Keep Your Family Payroll Records Organized From Day One​

Hiring your children is one of the rare tax strategies that is simultaneously simple, well-documented, and lucrative — but its simplicity is exactly what tempts owners to run it informally. Timesheets in a shoebox, wages paid in cash, and a W-2 filled out from memory are how a legitimate $6,000 saving becomes a disallowed deduction with penalties. Treat your child's employment with the same bookkeeping discipline you give every other part of the business: separate accounts, contemporaneous records, and a clean audit trail from hours worked to dollars deposited.

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