Can I put my kid on payroll to lower my taxes?
The claim: “Put your kid on payroll and the tax vanishes.”
Partly true: it works only for real work at reasonable pay
Partly. IRC §162(a)(1) lets your business deduct a reasonable allowance for salaries for services actually rendered, including wages paid to your child. Your child's earned income can be sheltered by their own standard deduction, up to $16,100 for 2026. If your business is a sole proprietorship or a partnership owned only by the child's parents, wages to a child under 18 are also exempt from Social Security and Medicare taxes. The job and the pay must be real.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed · Law and figures current as of September 17, 2026
Key takeaways
- The work must be real, documented, and appropriate for the child's age, and the pay must be reasonable for that work.
- For 2026, a dependent child's standard deduction is the greater of $1,350 or earned income plus $450, up to $16,100 (Rev. Proc. 2025-32).
- The payroll tax exemption applies only to a sole proprietorship or a partnership owned solely by the child's parents. S corporation and C corporation wages are fully subject to payroll taxes.
- You still need to run real payroll: Form W-4, withholding as required, Form W-2, and payment into an account for the child.
- A child with earned income can contribute to an IRA or Roth IRA, up to $7,500 or their compensation if less, for 2026 (Notice 2025-67).
Where the claim comes from
Hiring your children is a real planning tool, and it is widely promoted. The versions that spread online often drop the requirements: put a toddler on payroll as a "model," pay whatever amount erases your tax, and pay for expenses you would have covered anyway.
The rule behind the idea is that wages are deductible to the business and taxed to the child, who often has little other income. The rule works only when there is a real job.
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 apply: the child must actually perform services, and the pay must be reasonable for those services. Wages paid to family members get close review. The Tax Court has disallowed or reduced deductions where the work was vague, undocumented, or clearly overpaid for the child's age and ability.
The child reports the wages. For 2026, Rev. Proc. 2025-32 sets the standard deduction for a single filer at $16,100. For someone who can be claimed as a dependent, it is the greater of $1,350 or earned income plus $450, but not more than $16,100. A child with $12,000 of wages and no other income has a $12,450 standard deduction and owes no federal income tax. The kiddie tax applies to unearned income, not wages.
IRC §3121(b)(3)(A) excludes from FICA the services of a child under 18 employed by a parent. The IRS explains that this applies to a sole proprietorship or to a partnership in which each partner is a parent of the child, and that FUTA does not apply until the child turns 21. If the business is a corporation, including an S corporation, or a partnership with other partners, the child's wages are subject to Social Security, Medicare, and FUTA taxes like any other employee's.
Child labor laws still apply. Federal and Texas rules exempt many children who work for their parents' businesses, but not in hazardous jobs. Confirm the rules for your situation.
What is true and what is not
A 15-year-old who does real work, such as scanning files, cleaning the shop, or editing social media content, at a market hourly rate, with timesheets, can be a legitimate employee. A 4-year-old paid $15,000 as a "marketing director" is not. Money paid to a child is the child's money. Using it for things you are already legally required to provide, such as basic support, weakens the arrangement.
- True: reasonable wages for real work are deductible, and the child's standard deduction can shelter them.
- True: parent-owned sole proprietorships and partnerships avoid FICA on wages to children under 18.
- Not true: any amount works, whatever the child actually does.
- Not true: the FICA exemption applies to S corporation wages.
What to do instead
Write a simple job description with age-appropriate tasks. Set an hourly rate based on what you would pay an unrelated worker for the same tasks, and keep timesheets and samples of the work. Run the wages through payroll, issue a Form W-2, and pay the child by transfer to an account in the child's name. A child who owed no federal income tax last year and expects to owe none this year can generally claim exemption from withholding on Form W-4, but you still file the employer payroll returns that apply to your business.
Pay on a regular schedule rather than in one year-end lump sum, and make sure the hours match the work and the child's school calendar. Keep the child's wages separate from family money. Paying your child does not by itself stop you from claiming the child as a dependent, as long as the dependency tests are still met, including the rule that the child does not provide more than half of their own support.
If you operate as an S corporation, compare the benefit after payroll taxes. It may still make sense, but it is smaller. Consider a separate parent-owned management entity only if it has a genuine business role, and involve your attorney before restructuring.
How ebotCPA helps
We review the tasks, hours, and pay rate, set up the payroll and records, confirm whether the FICA exemption applies to your entity, and model the combined effect on your return and your child's.
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.
Assumptions: Tax year 2026; parents file jointly; the business is a sole proprietorship owned by a parent.; Parents' taxable income is about $260,000 before the change, so the change falls in the 24% bracket ($211,400–$403,550); the parent's net earnings from self-employment stay below the $184,500 Social Security wage base.; The child, age 15, works documented hours at a market rate for $12,000 of wages and has no other income; the parents claim the child as a dependent.; The §199A deduction applies at 20% of qualified business income and is not limited by taxable income; state tax is ignored.
| Self-employment tax reduction ($12,000 × 92.35% × 15.3%) | $1,696 |
|---|---|
| Reduction in AGI ($12,000 − $848 lost deduction for half of SE tax) | $11,152 |
| Lost §199A deduction (20% × $11,152) | $2,230 |
| Income tax reduction (($11,152 − $2,230) × 24%) | $2,141 |
| Parents' total federal tax reduction | $3,837 |
| Child's income tax ($12,000 − $12,450 standard deduction) and FICA | $0 |
At these assumptions, the family's federal tax falls by about $3,837, but only because the work is real and the pay is reasonable.
Illustration only; not a projection of your results.
Frequently asked questions
How much can I pay my child tax-free in 2026?
If wages are your child's only income, up to $16,100 is covered by the standard deduction for 2026, so no federal income tax is due. The amount must still be reasonable for the work performed.
Do I have to withhold Social Security and Medicare on my child's wages?
Not if your child is under 18 and the business is a sole proprietorship or a partnership owned only by the child's parents. S corporations and C corporations must withhold.
Can a young child be a legitimate employee?
Only for work the child can actually do, such as appearing in the business's advertising, at the market rate for that work, with records to support it.
Can my child put their wages in a Roth IRA?
Yes. For 2026 a child can contribute up to $7,500 or their earned compensation, if less. Because the child is a minor, the account is usually held as a custodial account.
Have facts like these?
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.