Every summer, the same advice circulates among business owners, put your kids on payroll. It's pitched as a tax move: shift income to a lower bracket, deduct the wages, save a few thousand dollars. That's accurate, but it's also the smallest part of the opportunity.
For business owners thinking seriously about how to translate enterprise value into lasting family wealth, hiring your child is one of the earliest, simplest tools you have to teach the next generation how work, money, taxes, and saving connect. The tax deduction is meaningful. The Roth IRA opportunity is more meaningful. But the lesson is what compounds. Here's what to know before you do it.
Can you hire your child in your business?
Yes, if the work is legitimate, the pay is reasonable, and you document it the way you would for any other employee. The IRS has no objection to family employment. What it scrutinizes is arrangements that look like disguised gifts. A 14-year-old organizing inventory, scanning documents, or running social media for the business is defensible. A 7-year-old being paid $20,000 to "consult" is not.
Three things have to hold up: the job is legitimate and age-appropriate, the pay reflects what you would pay an unrelated employee for the same work, and you have the paperwork to prove both. If those are in place, the strategy is sound. If they are not, the deduction can be disallowed and the tax benefits unwound.
How much can you pay your child tax-free in 2026?
A child can earn up to $16,100 in 2026, the federal standard deduction for single filers, without owing federal income tax. For a child claimed as a dependent with only earned income, the practical result is generally the same: wages up to $16,100 are not subject to federal income tax in 2026.
That said, "tax-free" only refers to federal income tax. State income taxes may still apply, payroll taxes depend on entity structure (more on that below), and proper withholding and W-2 reporting are still required. The wages are not exempt from process, only from federal income tax at the child's level if total earned income stays under the standard deduction.
Your business deducts the wages as an ordinary expense. For a pass-through business owner in the top federal bracket, a $16,000 wage deduction could reduce federal income tax by roughly $5,900 before considering payroll taxes, state taxes, QBI interactions, and other planning variables. That's the headline number most articles lead with. For the business owners this strategy is built for, $5,900 is meaningful money, but it's not life-changing money. The deduction is the bonus. The Roth IRA is the point.
Can your child contribute to a Roth IRA from these wages?
Yes. Earned income is the gating requirement for IRA contributions, and wages from a legitimate job in your business qualify. For 2026, your child can contribute up to the lesser of their earned income or $7,500 to a Roth IRA. This is the part of the conversation that matters most for business-owner families.
A Roth IRA opened at 15, funded consistently through the teen years, has more than 50 years of tax-free compounding ahead of it before traditional retirement age. Even modest contributions made during those years can grow into a meaningful asset over time.
A few things to know: the child must have the earned income to support the contribution, the contribution can come from anyone (a parent can fund it on the child's behalf as long as it does not exceed the child's earned income for the year), and a custodial Roth IRA holds the account until the child reaches the age of majority in your state.
If you're already thinking about generational wealth, gifting strategy, or how to fund opportunities for your children without creating dependence, this is one of the cleanest vehicles available to you. It's not a loophole. It's a legitimate use of the tax code that aligns with everything you would want for a kid growing up in a successful family.
Do you have to pay payroll taxes on your child's wages?
It depends on how your business is structured.
Sole proprietorship, or partnership where each partner is a parent of the child: Wages paid to a child under 18 are generally exempt from Social Security and Medicare (FICA). Wages paid to a child under 21 are generally exempt from federal unemployment tax (FUTA). This is the most tax-efficient structure for this strategy.
Single-member LLC owned by the parent, disregarded for income tax purposes: The family employment tax exceptions may still apply, but the LLC may have separate employment-tax reporting obligations. Coordinate this with your CPA and payroll provider.
Spouse-owned LLC: This is where many business owners get tripped up. A qualified joint venture is a separate IRS concept, and the IRS generally does not allow an LLC owned by spouses to elect qualified joint venture treatment unless special community-property rules apply. Georgia is not a community property state. Do not assume your spouse-owned LLC qualifies for the family payroll tax exceptions without confirming with your tax advisor.
S-corporation or C-corporation: The family payroll tax exemptions generally do not apply. The business can still deduct reasonable wages, and the child can still have earned income for Roth IRA purposes, but the payroll tax savings are usually not available.
LLC taxed as an S-corp or C-corp: Treated as a corporation for these purposes. No exemption.
If your business is an S-corp, which is common for operating businesses with material profit, there's a planning conversation worth having. But it requires coordination, not a DIY approach.
What are the rules for hiring your child in an S-corp?
You can hire your child directly in your S-corp, but you'll pay full payroll taxes on their wages. The deduction and Roth IRA benefits remain. The FICA and FUTA exemptions do not.
Some S-corp owners ask whether a separate management company could employ the child and provide legitimate services to the operating business. This is not a plug-and-play workaround. It requires a legitimate business purpose, services that are genuinely provided, arm's-length pricing, separate books and bank accounts, proper payroll, and coordination with tax and legal advisors. A shell entity created only to avoid payroll taxes is not a planning strategy.
For some families, the structure makes sense for reasons that extend beyond this specific tax question. For others, it's not worth the complexity. This is a conversation to have with your CPA, your attorney, and your wealth planner before you set anything up, not after.
How do you document hiring your child correctly?
Treat your child like any other employee. The IRS audit risk on these arrangements is meaningful, and the documentation requirements are not optional.
What you need: a written job description appropriate to the child's age and skill set, time logs or weekly work summaries showing hours worked, formal payroll records and documented wage payments (not informal transfers, not Venmo, not credited to a personal account), a W-2 issued at year-end, an hourly rate consistent with what you would pay an unrelated employee for the same work, and compliance with your state's child labor laws, which vary significantly and apply even to family employment.
Reasonable work for younger children includes filing, scanning, organizing inventory, light cleaning, mailings, helping with events, basic data entry, and photography. Teenagers can handle social media, email marketing, light bookkeeping, customer service, and administrative projects. If the work is legitimate, the pay is fair, and the records are clean, you have a defensible arrangement.
The bigger picture
The reason this conversation belongs in financial planning, not just tax planning, is that it's one of the earliest meaningful opportunities to teach a child how wealth works. A teenager who gets a paycheck, sees taxes withheld, watches a portion of every check go into a Roth IRA, and understands why, that child is being taught something most adults never learn. Not from a finance class. From experience.
For business-owner families, especially those who may be heading toward a liquidity event in the next five or ten years, the years before that event are when capacity gets built. Hiring your child will not make them a steward on its own. But it opens a door to the conversations that will: how the business generates the lifestyle they enjoy, why deferring consumption matters, what compounding looks like in their own account, how taxes work, why structure matters. That's the part no CPA blog covers. And it's the part that matters most.
If you're a business owner thinking about how to align the success of your company with the long-term financial life of your family, hiring your child this summer is a small lever, but a meaningful one. Worth doing. Worth doing correctly.
Frequently asked questions
Can I hire my child in my family business?
Yes. The IRS permits family employment as long as the work is legitimate, the pay is reasonable for the role, and you document the arrangement like any other employment relationship: job description, time tracking, payroll, and a W-2.
How much can I pay my child tax-free in 2026?
A child can earn up to $16,100 in 2026 without owing federal income tax, since that matches the standard deduction for single filers. State taxes, payroll taxes, and withholding rules may still apply depending on the situation.
Can my child contribute to a Roth IRA from wages I pay them?
Yes. Wages from legitimate employment qualify as earned income for Roth IRA purposes. For 2026, your child can contribute up to the lesser of their earned income or $7,500.
Do I have to pay payroll taxes when I hire my child?
It depends on your entity structure. Sole proprietorships and partnerships where each partner is a parent of the child are generally exempt from FICA on wages to children under 18 and FUTA on wages to children under 21. S-corps and C-corps are generally not exempt.
Is hiring your kid a tax loophole?
No. It's a long-established provision of the tax code. The IRS audits these arrangements when they look like disguised gifts, but legitimate family employment with real work, fair pay, and proper documentation is fully compliant.
This article is for informational purposes only and does not constitute financial, legal, or tax advice. Tax laws are complex and subject to change, and the rules around family employment vary by entity structure and state. Please consult a qualified tax professional, attorney, and financial advisor for guidance specific to your situation.
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