Can I hire my newborn and deduct the salary?
The claim: “Putting your newborn on payroll creates a large tax deduction automatically.”
False — no deduction without real services
No. IRC §162(a)(1) allows a business to deduct only a reasonable allowance for compensation for personal services actually rendered. A newborn cannot perform services, so any amount labeled salary is not deductible compensation. Paying your children can be legitimate when they are old enough to do real work, the pay matches that work, and the arrangement is documented.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed · Law and figures current as of September 17, 2026
Key takeaways
- IRC §162(a)(1) limits the deduction to reasonable pay for services actually rendered.
- An infant renders no services, so the reasonable pay for the work done is $0.
- Money moved to a baby's account is a gift or a personal expense, not wages, and may carry gift tax filing duties above the $19,000 annual exclusion for 2026.
- The legitimate family-payroll strategy requires a child who actually works, age-appropriate duties, time records, and market pay.
- A disallowed wage deduction can bring back tax, interest, and a 20% accuracy-related penalty.
Where the claim comes from
Short videos promote "hire your kids" as a way to shift income into a child's lower bracket. Some versions push the idea to its limit and suggest putting a newborn on payroll the week the baby comes home. The underlying strategy, paying a child who works in the family business, is real. The newborn version skips the one requirement that makes it work: the child has to do the work.
The newborn version also tends to leave out what happens after the deduction is claimed. Payroll for an employee means Forms W-2 and W-3, wage reporting, and, for most employers, federal unemployment tax filings. Each of those forms states that a person worked. When the person is an infant, the paperwork itself documents the problem.
What the law actually says
IRC §162(a)(1) allows a deduction for "a reasonable allowance for salaries or other compensation for personal services actually rendered." Two tests are built into that sentence. The services must actually be performed, and the amount must be reasonable for those services. Both are questions of fact that the business must prove with records.
When pay goes to a family member, the IRS and the courts look closely at whether the child really worked, what the child did, how many hours were spent, and whether an unrelated person would have been paid the same amount for the same tasks. A payment that fails these tests is not compensation. It is a transfer from parent to child: a nondeductible personal expense under IRC §262, and a gift if it is not otherwise a support obligation.
The burden of proof sits with the taxpayer. IRC §6001 requires records sufficient to establish each deduction, and an examiner reviewing family wages will ask for the job description, timesheets, evidence of the work product, and proof that the money was actually paid to the child and used for the child's benefit. Examiners follow the employment tax guidance in IRM 4.23.5 and, where a deduction is unsupported, may assert the 20% accuracy-related penalty under IRC §6662 using the procedures in IRM 20.1.5.
What is true and what is not
It is true that wages paid to your own child can be deductible, and that a child under 18 working for a parent's sole proprietorship (or a partnership owned only by the child's parents) is exempt from Social Security and Medicare taxes under IRC §3121(b)(3)(A). It is also true that a dependent child's standard deduction for 2026 is the greater of $1,350 or earned income plus $450, up to the regular $16,100, so modest wages for real work can be sheltered from federal income tax.
It is not true that the birth certificate is the qualification. With no services there is no compensation, no wage deduction, and no payroll tax exemption to apply. Filing W-2s for an infant does not change the facts; it creates a record that contradicts them.
- True: pay for real, age-appropriate work at a market rate is deductible.
- True: the FICA exemption applies only to the child's wages from a parent's sole proprietorship or parents-only partnership.
- Not true: a newborn can earn deductible wages.
- Not true: a W-2 or payroll service makes a payment into compensation.
What to do instead
If your children are old enough to help, define real tasks, such as filing, cleaning the shop, product photography, or social media work suited to their age. Write a simple job description, track hours on a timesheet, pay a rate you could defend by comparing it with what you would pay an outside worker, and pay from the business account into an account in the child's name.
Check the entity. The FICA exemption does not apply to wages paid by an S corporation or C corporation, even if you own all of it. If your baby has no job, consider tools that are built for young children, such as a custodial account or a 529 plan, and treat those contributions as the gifts they are.
Keep the numbers modest and consistent with the work. A teenager who files and scans for a few hours a week supports a small annual wage, not a five-figure salary. If you want to go further, a child with earned income can contribute to a Roth IRA up to the lesser of the annual limit or the child's earned income, which gives the wages a long-term use that is easy to document.
How ebotCPA helps
We review whether your children's roles, hours, and pay rates meet the §162 standard, confirm whether your entity qualifies for the payroll tax exemption, and set up the timesheets and payroll records that support the deduction.
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.
Assumptions: Tax year 2026; married filing jointly; sole proprietorship.; Taxable income stays within the 22% bracket ($100,800 to $211,400) after the adjustment.; The IRS disallows the full $30,000 because no services were performed.; Federal income tax only; self-employment tax, interest, and state tax are not shown.
| Amount paid and labeled salary | $30,000 |
|---|---|
| Services actually rendered | None |
| Allowable deduction under §162(a)(1) | $0 |
| Additional federal income tax ($30,000 × 22%) | $6,600 |
| Possible accuracy-related penalty (20% × $6,600) | $1,320 |
Under these assumptions, the claimed deduction produces about $6,600 of additional income tax and a possible $1,320 penalty, before self-employment tax and interest.
Illustration only; not a projection of your results.
Frequently asked questions
How old does my child have to be to work in my business?
No federal tax rule sets a minimum age. The test is whether the child actually performs services worth the pay. Very young children can rarely do work that supports meaningful wages, and state and federal child labor laws still apply.
Can my S corporation pay my kids without payroll taxes?
No. The §3121(b)(3)(A) exemption covers a parent's sole proprietorship and a partnership in which each partner is a parent of the child. Wages from a corporation are subject to FICA even if you own all of the shares.
What records do I need to pay my child?
A written description of duties, timesheets, a rate supported by what you would pay an unrelated worker, payments from the business account, and Form W-2 reporting.
Is money I put in my baby's account deductible?
No. It is a personal transfer. It may be a gift, and gifts to one person above $19,000 in 2026 generally require a Form 709 gift tax return.
Have facts like these?
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.