How to Hire Your Child as an Employee and Save on Taxes

Hiring your child as an employee can be a strategic move that benefits both your family and your business. Not only does it provide your child with valuable work experience, but it can also offer significant tax advantages. By employing your child, you may be able to reduce your taxable income. You can deduct wages paid to your child as a business expense. Additionally, their wages may not be subject to Social Security and Medicare taxes. This applies if your child is under 18 and works for a sole proprietorship or partnership owned by their parents. However, it’s crucial to ensure that the employment arrangement is legitimate.

A financial advisor can help determine if hiring your child makes sense for your personal tax situation.

Family Employees and Taxes

Tax regulations offer attractive tax benefits to owners of small businesses who hire their children. The child’s earnings are also likely to qualify for favorable tax treatment.

In 2026, a child who qualifies as a dependent generally has a standard deduction equal to the greater of $1,350 or earned income plus $450, up to the $16,100 standard deduction for a single filer. As a result, a dependent child could generally earn as much as $16,100 without owing federal income tax. Your business also gets to deduct your child’s wages as a business expense. ¹

You can’t just hand your kid cash and claim it as a deduction, however. The IRS requires you to follow rules to make the most of this tax play. To properly hire your child and unlock tax savings, keep these guidelines in mind:

• Give them an actual job: Your child must perform necessary work related to your business. Personal tasks like mowing your lawn don’t count.
• Make sure the work suits the child as well: Paying a 16-year-old to sweep out the warehouse is credible. Claiming a kindergartner keeps the books is not.
• Pay reasonable wages: Compensate your child fairly, as you would any non-relative employee. The IRS may flag excessive pay.
• Follow employment laws: Treat your child like any other employee when it comes to tax withholding, forms filing and more.
• Keep good records: Carefully document hours worked, pay received and taxes paid.
• Consider tax implications: Your child’s pay may face Social Security, Medicare and unemployment taxes. This largely depends on their age and your business structure.

As long as the employment is legitimate and the wages are reasonable, the business can usually claim the business expense. The child’s federal income tax will depend on total income, available deductions, and other tax circumstances.

Hiring Your Child in Action

An example may clarify how this could work in practice. Say you run a small social media consulting business as a sole proprietorship. You decide to hire your 16-year-old daughter to manage your company’s Instagram account for $12 per hour. She works 10 hours per week for 12 weeks during the summer, earning $1,200 total.

You pay her wages and get to deduct the $1,200 as a business expense. Her pay does not incur Social Security or Medicare taxes because she is under 18 and works for her parents. Her wages still follow federal income tax withholding rules, although the amount depends on what’s on her Form W-4.

At tax time, if your daughter qualifies as your dependent and her only income is the $1,200 of wages, her 2026 standard deduction would be $1,650 because a dependent’s standard deduction is generally the greater of $1,350 or earned income plus $450, subject to the $16,100 maximum for a single filer. Her $1,200 of wages would therefore result in no federal taxable income under these assumptions.

The payroll-tax treatment also benefits the business. Social Security and Medicare taxes normally total 15.3% between the employer and employee shares are combined. ² On $1,200 of wages, the combined amount would be $183.60. Because the wages in this example qualify for the family-employment exception, no Social Security and Medicare taxes apply. The business may also deduct the $1,200 of wages.

Before implementing a strategy like this, it can help to estimate the potential tax impact based on your income, filing status and deductions. You can use our income tax calculator to get a quick sense of how shifting income or claiming deductions could affect your overall tax liability:

Restrictions on Hiring a Child

Hiring a child to work in your business can be a beneficial arrangement for both the child and the employer, but it’s crucial to understand the legal restrictions involved. However, hiring your child is not a solution suitable for every taxpayer. If you are considering it, keep these limitations in mind:

• You need self-employment or business income to qualify for the deduction. It won’t work for wage earners.
• The exemption from Social Security and Medicare taxes for a child under age 18 generally applies when the child works for a parent’s sole proprietorship or a partnership in which each partner is a parent of the child.
• Wages paid to a child under age 21 in those qualifying parent-owned businesses are generally exempt from federal unemployment tax (FUTA).
• The IRS may flag high pay rates for children as unreasonable if they exceed the norm for their duties.
• You and your child must follow all documentation and reporting requirements. Failing to do so could nullify the tax benefits and possibly incur IRS penalties.
• Federal and state child labor laws can restrict the jobs and hours available to minors. Under federal law, children working for businesses entirely owned by their parents have broader employment exceptions, but children under 16 cannot work in mining or manufacturing, and workers under 18 cannot perform occupations the Department of Labor classifies as hazardous. State law may impose stricter requirements.

The IRS is not likely to give you much leeway if you violate these rules. However, the requirements are not particularly burdensome and tax savings can be substantial if everything is done correctly. The IRS is not likely to give you much leeway if you violate these rules. However, the requirements are not particularly burdensome and tax savings can be substantial if everything is done correctly.

Who Employs the Child Can Change the Payroll Tax Result

For federal payroll tax purposes, the identity of the employer matters. When a parent runs a business directly as a sole proprietor, compensation paid to that parent’s child can receive special treatment based on the child’s age. Social Security and Medicare taxes generally do not apply to those wages before the child turns 18. Federal unemployment tax generally does not apply before age 21.

A partnership can receive similar treatment only when the ownership meets the family-employment requirements. By contrast, incorporating the business changes who is considered the employer. If an S corporation or C corporation pays the child, the wages generally fall under the regular payroll tax rules even when the parent owns the company.

Suppose a 17-year-old earns $5,000 for documented office work during the summer. If the parent pays those wages through a qualifying sole proprietorship, the usual 7.65% employee FICA tax and matching 7.65% employer share would generally not apply. ³ On $5,000 of wages, that represents $382.50 on each side, or $765 combined. If a corporation owned by the parent pays the same $5,000, the family-employment FICA exception generally would not apply.

Bottom Line

Hiring your child as an employee can benefit a family business and provide the child with earned income, but the tax result depends on the business structure, the child’s age and whether the employment arrangement satisfies tax and labor rules. By employing your child, you can shift income from a higher tax bracket to a lower one, effectively reducing your overall tax liability. This approach can be particularly advantageous when a child under 18 works for a parent’s sole proprietorship or a partnership in which every partner is a parent, because qualifying wages are generally exempt from Social Security and Medicare taxes.

Tax Planning Tips

• If hiring your child seems like something you want to consider, meet with a financial advisor to ensure you fully understand the requirements before moving forward. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• SmartAsset’s Income Tax Calculator gives you a quick and easy way to estimate how much you will owe in federal, state and local taxes.

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