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If you’ve heard “hire your kids and it’s all tax-free,” you’ve heard the version that gets people in trouble.

The real version is simpler and more boring: you can deduct wages paid to your child for legitimate work and, in the right unincorporated setup, those wages can also be exempt from FICA (under 18) and FUTA (under 21). Separately, the wage deduction reduces your Schedule C net income, which can also reduce self-employment tax. (irs.gov)

Done correctly, this is a clean, ordinary wage deduction with unusually good side benefits. Done incorrectly, it turns into an IRS “disguised gift” argument.

TL;DR

• For a dependent child, the standard deduction is generally earned income plus an additional amount (capped at the regular standard deduction), so wage-only income is often sheltered and can result in $0 federal income tax in many common scenarios. (irs.gov)
• In a sole prop (including a single-member LLC taxed as a sole prop) or a partnership where each partner is a parent of the child, wages paid to the child are generally not subject to FICA under 18 and not subject to FUTA under 21. If there’s a non-parent partner, assume the exemption doesn’t apply. (irs.gov)
• In an S-corp or C-corp, assume normal payroll taxes apply. The strategy can still be worthwhile for high earners, but it’s usually not a payroll-tax play.
• The deduction survives on three things: real work, reasonable pay, contemporaneous records.
• Earned income can support a Roth IRA, and the compounding math is not subtle.

What “Hiring Your Children” Actually Means

It means your business pays your child for ordinary and necessary work and treats them like an employee – not like a dependent you hand money to.

This is not “I paid my kid, therefore deduction.”

This is “my business needed work done, my child did it, I paid a reasonable wage, and my file would be fine if someone asked questions.”

Who This Strategy Is For

Good fit

• Sole proprietors (including single-member LLCs taxed as sole props)
• Parent-only partnerships (a partnership where each partner is a parent of the child) (irs.gov)
  • If there’s a non-parent partner (even 1%), assume you don’t get the family FICA exemption.
• High earners, including S-corp and C-corp owners, who want a legitimate deduction and to create earned income for long-term Roth funding (even when payroll taxes apply)
• Families willing to run payroll correctly and keep documentation
• Businesses with real, recurring tasks a child can actually do

Not a good fit

• Anyone trying to disguise allowance as wages
• Anyone unwilling to keep timesheets and proof of output
• Businesses without real, needed tasks a child can legally execute
• Anyone whose plan is “we’ll make it make sense later”

Why Hiring Your Kids Can Work As Deduction (When It’s Real)

1) Deductible wages replace nondeductible allowance

Allowance is personal. Wages for bona fide services are generally a business expense.

2) Your child may owe $0 federal income tax on wage-only income in many cases

For 2026, the regular standard deduction for single filers is $16,100. (irs.gov)

Important nuance for dependents: a dependent child’s standard deduction is generally earned income plus an additional amount, capped at the regular standard deduction. The practical takeaway is the same for most planning: wage-only income is often sheltered and frequently produces $0 federal income tax under typical facts. But it’s not “a flat $16,100 no matter what.”

Also, tax liability and filing requirements are different analyses. Practically, if your child receives a W-2, you should expect to file a return in many cases even if the tax due is $0.

3) Earned income can support a Roth IRA

Earned income can support IRA contributions. For 2026, the IRA contribution limit is $7,500, limited to the child’s earned income for the year. (irs.gov)
W-2 wages are simply the cleanest documentation trail.

The Entity Reality Check: Where the Payroll Tax Savings Actually Exist

Sole proprietors and parent-only partnerships

In the classic fact pattern the IRS spells out (sole prop, or partnership where each partner is a parent of the child):

• Payments to a child under 18 generally aren’t subject to Social Security and Medicare taxes (FICA) (irs.gov)
• Payments to a child under 21 generally aren’t subject to FUTA (irs.gov)
• The wage deduction reduces Schedule C net income, which can also reduce self-employment tax

If there is any non-parent partner in the business, assume you do not qualify for the family FICA exemption.

S-corps and C-corps

In an S-corp or C-corp, assume normal payroll taxes apply to your child’s wages. The deduction can still be worthwhile (especially for high earners), but the “no payroll tax” angle usually disappears.

You’ll see people pitch separate-employer structures (management companies, etc.). Sometimes people explore them, but this is exactly where things can fail quickly: true employer, economic substance, and arm’s-length pricing. If the arrangement exists mainly to manufacture a payroll tax outcome, it can collapse under the same general scrutiny you see with thin intercompany arrangements – like the economic substance and arm’s-length issues you covered in your C-corp licensing discussion: https://fraimcpa.com/c-corp-licensing-agreement-risk/

If you’re publishing advice publicly, your safest posture is:

• assume payroll taxes apply in corporations, and
• treat anything beyond that as a fact-specific planning conversation that has to be documented and priced like a real arrangement.

How To Hire Your Child Correctly (Step-by-Step)

Step 1: Verify the work is legitimate

Why it matters: The work must be for the business, not the household.

How to do it:

• Identify tasks the business already needs done
• Assign age-appropriate roles
• Put it in writing (job description)

Good examples (when the business actually needs them):

• Filing, scanning, shredding business docs
• Inventory counting, labeling, packing (product businesses)
• Basic office cleaning of business space (not your personal house)
• Product photos, basic image sorting/tagging, uploading images for listings
• Social content support for older kids with real skills (draft captions, pull selects, prep schedules)

Bad examples:

• Household chores
• Babysitting siblings
• Anything that is mostly “being around while you work”
• “Model for the website” when it’s a one-off photo, no campaign, no deliverables, no usage documentation, and no rate support

Step 2: Set a reasonable wage you can defend without sweating

Why it matters: Excess pay is the fastest path to “gift” treatment.

How to do it:

• Benchmark local rates for similar tasks
• Keep 1–2 screenshots of comparable postings or wage references
• Pay an hourly rate unless you have a real reason not to

If you can’t say the rate out loud without adding a paragraph of justification, it’s probably not reasonable.

Step 3: Paperwork – treat them like an employee

Minimum file:

• W-4 (and any state equivalent)
• I-9
• Offer letter or employment agreement
• Job description
• Payroll setup records

Step 4: Track time and output (this is the whole game)

Why it matters: If you can’t prove the work happened, the deduction is easy to disallow.

Use:

• Weekly timesheets (hours, tasks, approval)
• Task logs
• Proof of output (folders with timestamps, checklists, before/after photos, inventory sheets, drafts)

Step 5: Pay on a normal cadence

Pick weekly, biweekly, or monthly. Stick to it.

Avoid:

• One big December check
• Random payments with no timesheets

Deposit wages into an account titled to the child (or a properly titled custodial account). The goal is to avoid circularity and “this was really just a gift.”

Step 6: Issue year-end forms and file payroll returns

• W-2 / W-3
• Quarterly payroll forms and state filings as required

The “Model for the Website” Trap (Real Example)

Modeling can be legitimate. The problem is when “modeling” is used as an excuse for an unreasonable payment.

One example always sticks with me: a business owner wanted to hire their seven-year-old as a “model” for the company website and pay them $12,000. The photoshoot would take about an hour. A pretty nice payday for a kid who had never modeled before, and I do not believe has modeled since. Situations like that are, of course, completely unreasonable, and the IRS will not tolerate them.

Paying reasonable wages for real work is fine. Paying a large amount for a thin “model” story is where deductions go to die.

Audit Red Flags and Common Mistakes

These are the fastest ways to lose the deduction:

• Household chores (personal ≠ business)
• Lump-sum year-end “wages”
• No timesheets
• No proof of output
• Inflated wages (“he’s good at Canva” is not a wage study)
• Paying through or depositing into the parent’s account
• Corporate “workarounds” without economic substance and arm’s-length pricing discipline

The Audit File Checklist (Print This)

If audited, you want to hand over a neat file, not a story.

• Job description (dated)
• Wage support (screenshots or notes showing how you set the rate)
• Weekly timesheets with approvals
• Proof of output (folders, logs, photos, drafts, inventory sheets)
• Payroll reports showing pay dates and amounts
• Copies of checks/direct deposits
• Bank statement showing deposits to the child/custodial account
• W-4, I-9, offer letter/employment agreement
• W-2/W-3 and payroll filings

Roth IRA Math: Why Earned Income Matters (7%–10%)

Assume a $7,500 Roth contribution at age 10, held until age 65 (55 years). Returns aren’t guaranteed and this ignores inflation – but it shows why people care.

One $7,500 contribution at age 10, to age 65:

• 7%: about $310k
• 10%: about $1.42M

Eight contributions of $7,500 (age 10 through 17), to age 65:

• 7%: about $1.98M
• 10%: about $8.32M

Even if payroll taxes apply (S-corp/C-corp), the long-term value of creating legitimate earned income can still be substantial.

2026 Quick-Reference Rules

Regular standard deduction (single): $16,100 (irs.gov)
Dependent standard deduction: generally earned income plus an additional amount, capped at the regular standard deduction.

FICA: under-18 exemption in the parent-owned unincorporated fact pattern (irs.gov)
FUTA: under-21 exemption in the same fact pattern (irs.gov)

IRA limit (2026): $7,500 (limited to earned income) (irs.gov)

FAQ

How old does my child need to be?
Old enough to perform real work. There’s no clean “IRS minimum age,” but the younger the child, the narrower the credible tasks.

Can I pay salary instead of hourly?
Yes, but hourly is usually easier to defend. Salary requires you to prove consistent output and that salary fits how comparable roles are paid in your business.

Does my child need to file a return?
Sometimes. The standard deduction drives the income tax result, but filing requirements depend on total facts. Practically, if your child receives a W-2, filing is often still appropriate even when tax due is $0.

Can I do this in an S-corp?
Yes. Just assume payroll taxes apply. It can still be worthwhile for high earners because it’s a legitimate deduction and creates earned income for the child.

Is this audited often?
It gets ugly when it looks like allowance relabeled as wages – no records, weird timing, inflated rates. Good files survive.

Next Steps: The Lowest-Risk Implementation

1. Choose tasks your business truly needs
2. Set a reasonable rate with some market support
3. Create a job description and simple employment agreement
4. Track hours weekly and keep proof of output
5. Run payroll on a consistent schedule and issue the W-2

If you only do three things:

• Keep timesheets
• Pay a rate you can defend
• Keep proof of output