IRC §3121(b)(3)(A), IRC §3306(c)(5), IRC §63

Hiring Children

A business may deduct reasonable wages paid to a child for legitimate work. For 2026, a dependent’s standard deduction is generally earned income plus $450, capped at $16,100, so wages can produce little or no federal taxable income when the child has no significant other income.

Payroll-tax treatment depends on the child’s age and the employer’s entity type, and state tax may still apply. The deduction depends on reasonable pay, real services, and records that would support the same arrangement with an unrelated employee.

Who this may apply to

Have children who can perform legitimate work
Children must be appropriate age for the work
Must pay reasonable wages for actual work performed
Need proper documentation and potentially payroll setup

Strategy connections

Works well with

Solo 401(k) / SEP-IRA Optimization: Legitimate earned income may allow the child to contribute to an IRA.

Watch out

S-Corporation Election: Corporate employers generally do not receive the family-employment payroll tax exceptions available to some sole proprietors and partnerships.

What could block this

No legitimate, age-appropriate work
Pay is not reasonable for the services
Payroll and work records cannot substantiate the arrangement

Important considerations

The savings shown are your business deduction benefit — your children file their own tax returns showing the wages, but owe $0 federal income tax on amounts within their standard deduction. This is a two-return strategy: the deduction lands on yours, the income lands on theirs (at $0 tax)
The work must be REAL — the IRS disallows deductions for wages paid for no actual work, and it scrutinizes family employment closely. The savings ceiling is the full deduction; whether you reach it depends on how thoroughly you document the work performed
If your business is an S-Corp, you lose the FICA exemption — you’ll still save income tax on the shifted income, but the math is less favorable
Children under 7 are very difficult to justify — the IRS will question what a 5-year-old can legitimately do for a business
At 18, the FICA exemption ends — wages are then subject to Social Security and Medicare taxes like any other employee

Professional support

Tax Strategist + Payroll Specialist

Will help set up compliant family employment, determine reasonable wages, and handle payroll requirements.

Timing

Wages must be earned during the tax year — set this up by Q1 or Q2 so there are enough pay periods to justify meaningful wages without suspiciously large single payments.

Official sources

Reviewed 2026-07-24