Step-by-step · 3 min read
Paying your kids through your business
Wages paid to your children for real work are deductible to the business. The child's standard deduction ($16,100 for 2026) can shelter that pay from federal income tax, so income taxed at your rate becomes income taxed at 0%.
The money then belongs to the child. It can pay for things you would buy for them anyway, or fund a Roth IRA that grows tax-free for decades.
- Who it fits
- Business owners with children who can do real work for the business.
- Usually not a fit
- W-2 employees without a business, and very young children who cannot do real work.
- Figures
- 2026 tax year
The key rule
The work must be real, the pay reasonable for the job and the child's age, and the paperwork the same as for any employee.
How it works
Payroll taxes depend on how your business is set up:
- Sole proprietorship, or a partnership owned only by the parents: pay to children under 18 is exempt from Social Security and Medicare tax, and under 21 from federal unemployment tax.
- S corp or C corp: the child is a regular employee, and normal payroll taxes apply. The income tax benefit still works.
6 steps
Define the job
Filing, scanning, social media, cleaning the office, modeling for marketing photos, simple data entry or video editing. Write a short job description.
Set a reasonable rate
What you would pay someone else of similar age for the same work. A 10-year-old shredding paper is not worth $50 an hour.
Complete the hiring paperwork
W-4, I-9 and any state forms. Check your state's child labor rules for age and hours.
Keep timesheets
Dates, hours and tasks, signed by the child and you.
Pay through payroll into the child’s account
Pay on a regular schedule into an account in the child's name, and issue a W-2 at year-end.
Put the money to work
Fund a Roth IRA up to the child's earnings, a 529 plan or the child's own expenses.
Example
A teenager in the family business
Your 15-year-old works 8 hours a week managing your business's social media at $20 an hour, about $8,300 a year. Your sole proprietorship deducts it, saving you around $3,000 of tax at your rate. Your child owes no federal income tax and puts $7,500 into a Roth IRA.
Common mistakes
- Paying for chores that are not business work.
- No timesheets.
- Paying more than the job is worth.
- Running the pay through an S corp and expecting the payroll tax exemption.
Key dates
- January 31
- W-2 due to the child and the Social Security Administration.
Questions we hear
Does this affect financial aid later?
Income and assets in the child's name can count more heavily for financial aid. A Roth IRA balance is usually not counted as an asset.
General education for TaxSquad clients, not advice for your situation. Rules and figures change. Talk to us before acting on this guide.