Can I lower my taxes by paying my kids?
The claim: “Paying your kids is an effortless tax dodge.”
Partly true: only real wages for real work
Partly. Wages your child earns for real work are earned income, which the kiddie tax in IRC §1(g) does not tax at your rate, and for 2026 a dependent's standard deduction can shelter earned income up to $16,100. Your business can deduct those wages under IRC §162(a)(1) only if they are reasonable pay for services actually rendered. Wages without real work are not deductible and shift nothing.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed · Law and figures current as of September 17, 2026
Key takeaways
- The kiddie tax applies to a child's net unearned income, not to wages.
- For 2026, a dependent's standard deduction is the greater of $1,350 or earned income plus $450, up to $16,100 (Rev. Proc. 2025-32).
- The business deduction requires real services and pay comparable to what an unrelated worker would receive.
- A child under 18 employed by a parent's sole proprietorship, or a partnership owned only by the parents, is exempt from Social Security and Medicare taxes; corporations get no such exemption.
- Timesheets, a job description, payroll filings, and actual payment to the child are essential.
Where the claim comes from
Hiring your children is a well-known planning idea for business owners, and it can work. Online versions often present it as automatic: put the kids on payroll, and the tax disappears.
The planning works only when the facts support it. The child must actually work, the pay must be reasonable, and the payroll must be handled correctly.
What the law actually says
IRC §162(a)(1) allows a business to deduct a reasonable allowance for compensation for personal services actually rendered. Treas. Reg. §1.162-7(a) asks whether payments are reasonable and are in fact payments purely for services. Pay for a teenager doing filing, cleaning, or social media work should be in line with what you would pay an unrelated person for the same tasks.
IRC §1(g), the kiddie tax, applies to a child's net unearned income, such as interest, dividends, and capital gains. It generally reaches children under 18, and some older students, whose unearned income exceeds a threshold. For 2026, net unearned income is income above $2,700 (twice the $1,350 amount in Rev. Proc. 2025-32). Wages are earned income and are taxed at the child's own rates.
The child's standard deduction also matters. Under IRC §63(c)(5) and Rev. Proc. 2025-32, a dependent's 2026 standard deduction is the greater of $1,350 or earned income plus $450, but not more than the $16,100 standard deduction for single filers. That means a child with only wage income can generally earn up to $16,100 in 2026 without federal income tax.
Payroll taxes depend on the business structure. IRS guidance explains that payments to a child under 18 who works for a parent's sole proprietorship, or a partnership in which each partner is a parent, are not subject to Social Security and Medicare taxes, and payments to a child under 21 are not subject to FUTA tax. If the employer is a corporation, including an S corporation, or a partnership with non-parent partners, those taxes apply regardless of age.
What is true and what is not
It is true that reasonable wages for real work can move income from a parent's higher bracket to a child's lower one, and that a parent-owned sole proprietorship can also avoid payroll taxes on those wages for a child under 18. The child can also use earned income to fund an IRA.
It is not true that the arrangement is effortless or works without real work. Wages that exceed the value of the services, or that are paid for no services, are not deductible. Paying a child and then using the money for household expenses you would normally cover can also undermine the arrangement.
- Age-appropriate, real tasks for the business.
- Reasonable pay supported by local market rates.
- Timesheets and a written job description.
- Payroll filings, including Form W-2 where required.
- Payment into an account that belongs to the child.
What to do instead
Before adding a child to payroll, confirm the work, set a documented rate, and check how your entity type affects payroll taxes. Track hours as the work happens, and pay on a regular schedule like any other employee.
Review the arrangement each year. As children grow, their duties and pay can change, and the total should stay consistent with the work performed.
How ebotCPA helps
We review whether family employment fits your business, estimate the combined effect on your family's taxes, and set up payroll and documentation that match the rules for your entity type.
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.
Assumptions: Tax year 2026; parents file jointly and the wages come off income taxed in the 24% bracket ($211,400 to $403,550 for 2026).; The business is a Schedule C sole proprietorship owned by a parent whose net self-employment earnings are below the $184,500 Social Security wage base; Additional Medicare Tax does not apply.; The child is 15, performs real work, and is paid $12,000, which is reasonable for the work; the child has no other income.; The §199A deduction and state taxes are ignored for simplicity; if §199A applies, the benefit is smaller.
| Parent's income tax reduction (24% × $12,000) | $2,880 |
|---|---|
| Parent's self-employment tax reduction (15.3% × 92.35% × $12,000) | $1,696 |
| Less: smaller deduction for half of SE tax ($848 × 24%) | −$204 |
| Child's standard deduction (greater of $1,350 or $12,000 + $450, capped at $16,100) | $12,450 |
| Child's federal income tax | $0 |
| Social Security and Medicare tax on the child's wages | $0 |
| Estimated net federal tax reduction for the family | $4,372 |
Under these assumptions, paying the child $12,000 for real work reduces the family's federal taxes by about $4,372.
Illustration only; not a projection of your results.
Frequently asked questions
How much can I pay my child tax-free in 2026?
A child with only wage income generally owes no federal income tax on up to $16,100 in 2026, but your deduction depends on the pay being reasonable for real work.
Does the kiddie tax apply to my child's wages?
No. The kiddie tax applies to net unearned income, such as investment income. Wages are taxed at the child's own rates.
Can my S corporation pay my children without payroll taxes?
No. The Social Security, Medicare, and FUTA exemptions apply only to a parent's sole proprietorship or a partnership owned only by the parents.
Does my child need a W-2?
Wages paid to your child as an employee are reported on Form W-2 when the reporting requirements are met. Keep payroll records either way.
Have facts like these?
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.