Hiring your kids: the tax strategy that requires actual work

By Tom, CPA · Updated October 27, 2026

Part of: Easy Tax Strategies

TL;DR: A business owner can pay a child reasonable wages for real work. The business deducts the wages; the child can earn up to the $16,100 2026 standard deduction with no federal income tax. Wages paid by a parent's sole proprietorship (or a partnership owned only by the parents) to a child under 18 are exempt from Social Security and Medicare tax. The wages also allow a Roth IRA contribution. It requires real work, market pay, and paperwork.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Somewhere, right now, a finance influencer is telling parents to "put your toddler on payroll as a model." Please do not take tax advice from someone who also sells a course on manifesting. Hiring your kids is a legitimate, IRS-recognized strategy, but only when the child does real work, is paid a reasonable wage for it, and you document it like an employer would. Done honestly, it shifts income from your high bracket to your child's zero bracket and seeds a Roth IRA for decades of compounding.

Figures from IRS Rev. Proc. 2025-32 and Publication 15, checked October 27, 2026. Part of easy tax strategies; this is one of the more aggressive moves on that list.

CPA Warning Label: This is an audit-attractive strategy: pay for fake or inflated work is disallowed, and the FICA exemption does not apply to S corporation or C corporation payroll.

Real work requirement

The wage must be for services actually performed, necessary to the business, and at a rate you would pay an unrelated person for the same work. Tasks that usually hold up for school-age kids:

• Cleaning the office, shop or rental units between tenants.
• Filing, scanning, data entry, shipping and packing orders.
• Social media posting, photography, simple website updates, for teens with the skills.
• Landscaping and maintenance at a business property.
• Modeling in actual marketing materials that you publish, paid at a reasonable rate.

Tasks that do not: household chores, babysitting siblings, "being cute," or anything a five-year-old cannot realistically do. Age matters: courts have accepted wages for young children doing simple tasks, but the younger the child, the more skeptical the examiner. Parents with rentals should also read real estate professional status for spouses, since the two strategies sometimes overlap.

Reasonable pay

Use market rates for the task in your area. If a cleaning service charges $25 an hour, paying your 14-year-old $25 an hour for the same work is defensible; paying $150 an hour is not. Keep a note of how you set the rate, such as quotes, job postings or a local wage survey. Pay must actually be paid, from the business account to the child's own account, not recorded on paper and kept in yours.

FICA exemption rules

Per IRS Publication 15, payments for the services of a child under 18 who works for a parent in a trade or business are not subject to Social Security and Medicare taxes, and payments to a child under 21 are not subject to FUTA, if the business is:

• A sole proprietorship owned by the parent, or
• A partnership in which each partner is a parent of the child.

The exemption does not apply when the employer is a corporation (including an S corporation) or a partnership with a non-parent partner. Those businesses can still hire the child and deduct reasonable wages, but must withhold and pay FICA, which makes the strategy less attractive. Some owners use a parent-owned management company structured as a sole proprietorship to employ the kids; that adds complexity and needs real substance.

How the math works

Illustration: Lavish Larry is a sole proprietor in the 32% federal bracket and a 5% state. He hires his 15-year-old daughter to do order fulfillment and social media for 8 hours a week at $20 an hour, for 50 weeks: $8,000 of wages. Assumptions: all figures are illustrative, she has no other income, the job and pay rate are documented.

The SE tax saving assumes Larry's self-employment earnings are below the Social Security wage base; above it, only the 2.9% Medicare portion is saved. For 2026, a dependent child's standard deduction is the greater of $1,350 or earned income plus $450, capped at the regular $16,100, so $8,000 of wages is fully covered.

Roth for kids

Earned income lets the child contribute to an IRA, up to the lesser of earned income or $7,500 for 2026. A Roth IRA is usually the right choice, because the child pays no tax now. The parent can fund the contribution as a gift, as long as the child had the earned income. The account is opened as a custodial Roth IRA in the child's name.

Why it is powerful: $7,500 a year from age 15 to 18 is $30,000; at an illustrative 7% real return, contributions made at ages 15 through 18 could grow to roughly $800,000 in today's dollars by age 65. Roth contributions can be withdrawn tax- and penalty-free at any time, which keeps flexibility for college or a first home. Details in the custodial Roth IRA guide. The child keeps the wages they earn; it is their money.

Paperwork

1. Form W-4 and Form I-9 for the child, like any employee, and keep proof of identity and work eligibility.
2. A written job description listing duties and the hourly rate, with how you chose it.
3. Timesheets showing dates, hours and tasks, filled in as the work happens.
4. Payroll: pay by check or transfer from the business account to the child's account, on a regular schedule.
5. Form W-2 issued to the child by January 31, and Form W-3 to the Social Security Administration, even when no FICA is withheld.
6. Child labor laws: check federal and state rules on hours and hazardous work for minors; some states require work permits.

Paying through the business's payroll system keeps records clean. Some families pay the child as an independent contractor; that is usually wrong for a minor doing directed work and costs the FICA exemption analysis.

Mistakes

• Paying a toddler. Very young children rarely perform services worth market wages.
• Paying more than the work is worth, especially conveniently just under the standard deduction.
• No timesheets. Reconstructed records do not persuade examiners.
• Money that never leaves the parents. If wages pay for the child's food and clothing, which parents must provide anyway, the deduction is vulnerable.
• Assuming the FICA exemption applies to an S corporation. It does not.
• Forgetting the kiddie tax. It applies to unearned income, not wages, but a child with large investment income and wages needs both analyzed.
• Losing financial aid. A student's income is assessed heavily on the FAFSA. Plan this for high school years with that in mind.

Where it fits in a FIRE plan

For self-employed parents chasing early retirement, moving a few thousand dollars from a high bracket to a zero bracket each year, while seeding a child's Roth, is one of the cleanest family tax moves available. It works best with a real business that has real tasks. Model kid costs and savings over the years with the cost of kids FIRE calculator. For later-stage transfers to children, see gifting a rental to kids and capital gains on rentals given to kids.

Where the rules come from

The FICA and FUTA family employment exceptions are in IRS Publication 15, section 3, and Internal Revenue Code sections 3121(b)(3) and 3306(c)(5). The dependent standard deduction rule for earned income is in Rev. Proc. 2025-32. Wage reasonableness is a facts-and-circumstances test under section 162.

Bottom line

Real job, real pay, real records, real paychecks to the child. Get those right and the family keeps thousands more each year while a teenager builds a Roth IRA. Skip them and you have built an audit exhibit instead.