Putting Your Kids on Payroll: The Tax Break and Its Limits

$14,000 in wages, $0 in Social Security and Medicare tax, and $0 in federal income tax for the 16-year-old who earned it. For a sole proprietor in the 22% bracket, the same $14,000 moved from profit to payroll can cut the family’s federal tax by roughly $4,300 to $4,800 in 2026. Hiring your children is one of the few payroll rules that works in a small contractor’s favor. The break is written into the Internal Revenue Code, which the IRS administers: section 3121(b)(3)(A) for Social Security and Medicare tax, and section 3306(c)(5) for federal unemployment tax. It is the law, not a favor the IRS can choose to grant.

It also has edges that are easy to miss. The break depends on how your business is set up, not on the child. It only holds if the work is real, the pay is reasonable and the records would satisfy an auditor. And child labor law still decides what a teenager can do on your jobs, even when you are the parent. Here is how it works, who qualifies, and where it stops.

Which businesses can use the family payroll exemption

The rule is in the tax code itself. Service by a child under 18 “in the employ of his father or mother” is not employment for Social Security and Medicare purposes, and service by a child under 21 is excluded from federal unemployment tax (FUTA). IRS Publication 15 spells out when that applies to a business, and it comes down to your structure:

The single-member LLC row needs a word of explanation, because the rules look contradictory. For employment taxes, an LLC with one owner is generally treated as a corporation. The Treasury regulations make a specific exception for family employment: the LLC “may qualify for the exception”, and the owner is treated as the employer (26 CFR 31.3121(b)(3)-1(d)). That holds only while the LLC is taxed as a sole proprietorship. Once you elect S corporation status, the payroll exemption is gone. Your child’s wages then carry the full 15.3% of Social Security and Medicare, half from the business and half withheld from the child.

Income tax is different from all of this. Your child’s wages are subject to income tax withholding at any age and under any structure. In practice, a teenager with no other income often owes no income tax anyway, for the reason in the next section.

What hiring your children saves, worked through

The family here is hypothetical, and the figures leave out state taxes. A married contractor filing jointly runs a sole proprietorship and sits in the 22% federal bracket for 2026. Their 16-year-old works part-time through the year on the office side and shop cleanup, and is paid $14,000 at a going rate, with timesheets.

• Self-employment tax saved by the parent: $14,000 × 92.35% × 15.3% = about $1,978.
• Income tax saved by the parent: the lower self-employment tax also shrinks its own deduction, so adjusted gross income falls by about $13,011. At 22%, that is about $2,862.
• Parent’s federal saving: about $4,840, or about $4,270 if the parent also claims the 20% qualified business income deduction, which the lower profit reduces.
• Child’s federal tax: $0. A dependent’s 2026 standard deduction is the greater of $1,350 or earned income plus $450, up to $16,100, according to Rev. Proc. 2025-32. On $14,000 of wages that is $14,450, so nothing is taxable. The child owes no Social Security or Medicare either.

Run the same job through an S corporation and the picture shrinks. The business pays $1,071 of employer Social Security and Medicare, the child has $1,071 withheld, and FUTA adds about $42. You still save income tax on the deduction, but there is no self-employment tax saving. The family comes out roughly $1,100 ahead, or less with the qualified business income adjustment. That is still worth something, but it is a quarter of the sole proprietor’s result.

Those figures move with your bracket, your state and how close you are to the Social Security wage base. Treat them as the shape of the answer rather than your number. Your tax preparer can run your own.

The work, the pay and the paperwork have to be real

Wages are deductible only if they are “a reasonable allowance” for “personal services actually rendered”, in the words of the tax code. The Tax Court looks at family wages closely, because money a parent gives a dependent child is presumed to be support. Two decisions show where the line falls.

In Embroidery Express and McMinn v. Commissioner (T.C. Memo. 2016-136), the court allowed wages the children earned during the year for cleaning, inventory and machine work. It disallowed large December bonuses as “partially for familial support”. It also criticized undated timecards that did not describe the work. In Fisher v. Commissioner (T.C. Summary Opinion 2016-10), a parent issued no W-2s, kept no payroll records and claimed wage deductions of about $8,000 to $10,400 a year for the children. The court allowed $250 per child per year. A summary opinion is not precedent, but it shows how much a missing record can cost.

So run your child through payroll exactly as you would any other employee:

• Form W-4 and Form I-9 at hiring. A child who owed no federal income tax last year and expects none this year can claim exempt on the W-4, and has to renew that each year by February 15.
• Timesheets that say what the work was and when. “Cleaned and restocked shop, 3 hours, October 3” holds up. “Helped out” does not.
• A pay rate you would pay someone else for the same task, at least your state’s minimum wage, paid on a regular schedule into an account in the child’s name. Avoid a year-end lump sum sized to your profit.
• The normal filings. Quarterly Form 941 still applies because the wages are subject to income tax withholding. Issue a Form W-2 at year-end. The Social Security and Medicare wage boxes stay empty for an exempt child. Keep the records at least four years.

If your books run through a payroll service, tell them the employee is your under-18 child in a sole proprietorship. Check that the exemption is set up, or the system may withhold tax that is not due.

What your child can do on the job, even for a parent

Federal child labor law gives parents room, but not on the parts of the trade that hurt people. Under the Fair Labor Standards Act, a child under 16 working only for a parent is exempt from the federal minimum-age and hours rules. That exemption does not cover mining, manufacturing or the jobs the Department of Labor has declared hazardous for anyone under 18. The hazardous occupations orders apply to your own 16- and 17-year-old as fully as to anyone else’s. For trade businesses they rule out, among others:

• all work in roofing operations and on or about a roof, including ground jobs such as roofing helper and materials handler;
• trenching and excavation, except manual trenches no deeper than four feet;
• circular saws, reciprocating saws, chain saws, band saws and abrasive cutting discs, and power-driven woodworking machines;
• forklifts, hoists and other power-driven hoisting equipment;
• demolition, and driving on public roads as part of the job, apart from a narrow exception for 17-year-olds.

The under-16 exemption also applies only where you are the child’s only employer. If your child helps you on work you do as someone else’s employee, the child counts as working for that employer too, and the parental exemption does not apply. State law can be stricter, too. Some states require work permits for minors or set their own hours limits, and where federal and state rules both apply, the stricter one wins. Check your state labor department before the first shift.

That leaves plenty of genuine work: answering calls and booking jobs, sending estimates and invoices, updating the website and social media, organizing the shop and restocking the truck, cleaning up at the end of a job, and helping with inventory. Those are also the tasks that are easiest to record.

A few more things worth knowing

• The exemption ends on a birthday. Wages paid after your child turns 18 carry Social Security and Medicare; FUTA follows at 21.
• Earned income opens a Roth IRA. A child with $14,000 of wages can contribute up to the 2026 IRA limit of $7,500, or their taxable compensation if that is lower.
• The kiddie tax does not apply to wages. It covers a child’s unearned income, such as interest and dividends, not pay for work.
• Your state may treat it differently. State income tax withholding, state unemployment coverage of family members and state minimum wage vary. Your state revenue and labor agencies are the source.

For the bigger question of whether your structure is still the right one, our LLC vs S corporation breakdown sets out the trade-offs. If this is your first employee of any kind, the guide to hiring your first employee covers registration and the rest of the payroll setup.

The takeaway is simple. Hiring your children works best for a sole proprietor or a parents-only partnership with real work to hand out, and it works only as well as the records behind it. In an S corporation it still helps, but mostly through the child’s standard deduction. In every structure, the roof, the trench and the saw stay off the list until your child turns 18.