You were going to give your kids money anyway. For the car. Or college. Or whatever they're asking for this week.
When you hand it over as a gift, it comes out of after-tax dollars. When you pay it as a wage for real work in your business, your business deducts it, and your child can earn up to $16,100 in 2026 without owing federal income tax.
Think of it as another one of my hidden doors, and this one is for your kids. The deadline for 2026 is December 31.
Your child works in your business. Real work, people. Filing, scanning, social media, cleaning up the shared drive that makes you nuts. Maybe feeding books into your LLM.
You pay them a real wage and your business deducts it. Your child then uses their own standard deduction, which is $16,100 for 2026. If the wages are their only income, they owe no federal income tax on that amount. (Investment income changes the math.)
Let's sketch it out.
Picture a sole proprietor in the 24 percent bracket who pays her 13-year-old $16,100 for a year of real work. Between federal, state, and self-employment tax, she keeps about $6,000 that would have gone to taxes. Her child keeps all $16,100, free of federal income tax.
Two things to check before you copy that example.
First, the hours. At $20 an hour, $16,100 is about 805 hours, or 15 hours a week all year. Can your 13-year-old really do that much useful work? If not, pay less. The deduction follows the work.
Second, your income. Most of that self-employment tax saving disappears once your business profit is over the Social Security wage base ($184,500 for 2026). At that point it drops from about $2,275 to about $430 on the same wage, so a higher bracket doesn't automatically mean a bigger saving. Run your own numbers.
Now, I have to give you the fine print. (There is always fine print.)
| Your business | Payroll taxes on your child's wages |
|---|---|
| Sole prop, or an LLC taxed as one | No Social Security or Medicare until 18. No federal unemployment tax until 21. |
| Partnership where each partner is the child's parent | No Social Security or Medicare until 18. No federal unemployment tax until 21. |
| S corp or C corp, including an LLC taxed as one | Social Security, Medicare, and federal unemployment tax at any age. |
| Partnership with any partner who isn't the child's parent | Social Security, Medicare, and federal unemployment tax at any age. |
If you're in one of the first two rows, that is pretty amazing.
If you run an S corp or a C corp, payroll taxes apply. A corporation isn't anyone's parent. You can still come out ahead, but by a lot less, and your child won't keep the full amount. In the 24 percent bracket, a $16,100 wage saves about $3,864 in federal income tax and costs about $2,464 in Social Security and Medicare ($1,232 from the business and $1,232 from your child). That leaves roughly $1,400 for the family before state tax, and your QBI deduction can shrink it further.
Whatever the work is worth. Ask what you'd pay someone else for the same job, and write the answer down.
Want to pay more than $16,100? You can. If your child puts up to $7,500 into a traditional IRA, they can earn up to $23,600 and still owe nothing federal.
If they stay under $16,100, skip the traditional IRA and open a Roth. It grows tax free, and it comes out tax free once the Roth rules are met. A 15-year-old with a Roth is a 65-year-old who cherishes how smart her parents were.
Your child can't contribute more than they earned, so this only works with real wages. They have until April 15, 2027 to make a 2026 contribution.
The Tax Court has allowed wages paid to a 7-year-old.
In Eller v. Commissioner (1981), a family paid three children, ages 7, 11, and 12 in the first year, to work in their businesses. The work included cleaning, grounds and pool maintenance, answering phones, and minor repairs. The IRS disallowed everything paid to the 7-year-old. The court allowed most of it. For 1972, it allowed $1,200 of the $1,650 the family claimed for him, because the amount has to match what the work was worth at his age.
Labor law matters too. Federal rules generally let children of any age work for a business entirely owned by their parents, with limits: no mining or manufacturing under 16, and no hazardous jobs under 18. Your state may be stricter, and when it is, the stricter rule wins.
A lawyer paid her three children, all under nine, to shred paper, answer phones, and make copies during their summer breaks. Over three years she deducted almost $29,000 in wages.
She didn't create the paper trail. There were no W-2s and no payroll records. The court couldn't tell how much each child was paid, how many hours they worked, or what the hourly rate was (Fisher v. Commissioner, 2016).
The court allowed $250 per child per year. That's $2,250 out of nearly $29,000. (Ouch.)
That's a Laura no-no.
If your project is a one-off, or your child is older, read my post on paying family members for one-time projects. The rules are different.
Want to know how this works for your structure before December 31? Book a free strategy call with my team.
To your ongoing success,
Laura
Generally, yes. A qualifying child has no income limit. They must be under 19 at year end, or under 24 and a full-time student, and they can't provide more than half of their own support. Wages they save don't count as support.
If wages are their only income and they earn no more than the standard deduction ($16,100 for 2026), a federal return generally isn't required. They'd file to get back any tax withheld. Your state may have its own rules.
No. Mowing your lawn or cleaning your house is personal, so your business can't deduct it. The work has to be for the business.
If the LLC is taxed as a sole proprietorship, it gets the same treatment as a sole proprietorship. If it elected S corp status, the corporation rules apply.
Social Security and Medicare apply in every structure once your child turns 18. In a sole proprietorship or parents-only partnership, federal unemployment tax still doesn't apply until 21. Your child still gets the standard deduction, so the income shift can still work.
This is general information, not tax or legal advice. Whether and how this works depends on your business structure, your child's age, and the work they actually do. Talk to your tax advisor about your situation.
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