2026: Get the Government to Pay You for Hiring Your Child 

I’m your government. I’ll give you $6,614 if you will pay your child $16,100 to work for you. Would you be interested in this proposition? 

That’s what the federal and state governments will pay Sara Jackson in 2026 because she will pay her 13-year-old child $16,100 to work in her Schedule C business. 

Had Sara operated her business as a corporation, the governments would have taken about $2,500 of that $6,614 in payroll taxes and Sara would have about $4,114. 

Going back to the Schedule C business, the $6,614 that Sara will receive comes from the built-in hiring-your-child tax breaks that we discuss in this article. And depending on you and your family, you can generate numbers vastly exceeding $6,614. 

Zero Taxes for the Child 

First, let’s examine Sara’s child. The child pays zero federal taxes on the $16,100 of earned income. Wow! That’s nice. Sara gets the tax deduction and pockets $6,614, and her child has $16,100 in tax-free dollars. 

What makes the child’s taxes zero? The standard deduction—this is the deduction in lieu of itemizing deductions for mortgage interest, property taxes, charitable contributions, etc. The 2026 standard deduction for a single taxpayer is $16,100.

Note This 

All the money remains in the family. Sara pays her child $16,100 in wages. The child has that money. The federal and state governments will pay Sara $6,614 in tax cash (refunds or reductions in taxes). The family has all the money: $22,714 ($16,100 + $6,614). 

Section 199A Takes a Bite 

One wrinkle did not exist when we first ran these numbers years ago. The wages you pay your child reduce your qualified business income, which shrinks your Section 199A deduction. If you qualify for the full 20 percent deduction, every $100 you pay your child cuts that deduction by $20, so the federal income tax saving on the wage could be 80 percent of what your bracket alone suggests.

Run Sara’s $16,100 through that filter and her benefit is $5,896 rather than $6,614 (a $718 difference). This is still a terrific return on a wage she was going to hand her child anyway, but she might have to plan on that smaller number thanks to the 199A tax break. 

But maybe not. Those same wages are W-2 wages for the Section 199A wage limitation. If your 2026 taxable income is above $201,750 (single) or $403,500 (married, filing jointly), your deduction is capped by a formula built on W-2 wages, and putting your child on the payroll raises that cap.

For high earners, hiring the child can increase the Section 199A deduction rather than reduce it. 

Why Hire Your Child? 

Hiring your child gives you the opportunity to work with someone you know, love, and trust. 

Plus, if you give money to your child and/or plan to help your child pay for college, the hire-your-child strategy is a big assist. First, you get a tax deduction for the wages, whereas just giving money to your child has to come from after-tax dollars. 

Second, your child can put earned income into either a traditional or a Roth IRA. That money grows tax-free. If the child wants to use the money for college, he or she can take the money from the IRA, penalty-free. This is a huge break. 

Pick the Roth first. The 2026 IRA limit is $7,500, and your child may put in no more than his or her earned income.A child whose wages sit at or below the $16,100 standard deduction is already paying zero tax, so a deductible traditional IRA deduction is worth nothing to that child. Have the child put the money in a Roth, where it grows and comes out tax-free. 

Use the traditional IRA only when the wages exceed the standard deduction and you want to erase the tax on the excess, which is exactly what the next two sections explain how to do. 

Pay More—Say, $23,600 

Say Sara wants to pay her child $23,600 and keep it federal tax-free for her child. Is this possible? Yes. Here is how the child gets to Zero federal taxes: 

• The child puts $7,500 in a tax-deductible traditional IRA.

• The $16,100 standard deduction eliminates the remaining $16,100. There’s nothing left to tax. 

And here’s how Sara benefits. The federal and state governments pay Sara $9,695 in after-tax cash for hiring her child, or perhaps $8,642 if Sara suffers a Section 199A haircut. 

Pay Even More—Say, $36,000 

If Sara pays her child $36,000, and her chld puts $7,500 in a tax-deductible traditional IRA, the child’s federal tax is $1,240, plus whatever the child’s state charges.After federal tax, the child has $34,760 ($7,500 of which sits in the separate IRA account). 

With this W-2 payroll, the federal and state governments hand Sara $14,789 in after-tax cash. Section 199A trims that to $13,183, because the wage cuts her qualified business income and with it her 20 percent deduction.

Big Picture: Mechanics

Let’s look at what happens with Sara and her child: 

• Sara writes W-2 payroll checks to her child totaling $36,000. She is out this cash. The child now has $34,760 of it, and the government has the remaining $1,240, which it collected in tax from the child.  

• Sara’s federal and state tax benefits from her $36,000 W-2 wage to her son create after-tax cash money of $13,183 after her Section 199A deduction. She puts this money in her bank account. 

Note that the family has $47,943 at this point ($34,760 + $13,183). 

What Happened to the Payroll Taxes? 

Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to Social Security and Medicare taxes if the trade or business is taxed as a sole proprietorship or a partnership in which each partner is a parent of the child.

The parental proprietorship and partnership hiring rules also exempt wages paid to a child under the age of 21 from federal unemployment taxes.

If you operate your business as either a single-member LLC taxed as a proprietorship or as a spouse-only LLC taxed as a partnership, the IRS allows the beneficial parental treatment of payroll taxes. For more on how this works, see IRS Now Says No Payroll Taxes on Family Employment in a Single-Member LLC. 

Corporate Treatment Is Different 

Corporations do not qualify as mothers or fathers of the children, and therefore the payroll breaks do not apply to wages paid by the owner’s corporation to the owner’s children. 

In the introductory part of this article, we mentioned that had Sara operated as a corporation, the family would have handed back about $2,500 of the benefit. 

On a $16,100 wage, the corporation pays $1,232 of Social Security and Medicare tax, the child pays another $1,232 out of his paycheck, and the corporation owes federal unemployment tax on the first $7,000 of wages. The corporation deducts its own share, so the true bite is a little smaller, but the total bite on both the child and the corporation is about $2,500. This is money the family simply loses.

Choice of Entity Consideration 

The difference in tax benefits when you hire one or more of your children is one of the differences that you need to consider when choosing an entity for the structure of your business. Depending on your choice of operating entity, here are three things to know: 

1. 1. 1. 1. Putting your under-age-18 children to work in your proprietorship or spouse-only partnership pays off for both the owners and the children. 

         2. Putting your under-age-18 children to work in your S corporation or C corporation also pays off, but to a lesser extent because of the payroll taxes. 

         3. The difference in benefits can tilt the scale in your choice of business entity, whether toward a corporation or a proprietorship. You may have to put pencil to paper here. Also, the children will get older each year, and thus you have to look repeatedly at the choice-of-entity scale as that happens. 

The kiddie tax does not apply to earned income. It applies to unearned income. Wage income is earned income. 

What about a Trump Account? 

Trump Accounts opened on July 4, 2026. Under new Section 128, an employer may contribute up to $2,500 a year to the Trump Account of an employee or an employee’s dependent, free of income tax to the employee, under a separate written Trump Account Contribution Program.

Click here for a sample plan that you can use. 

The obvious question is: Can your business put $2,500 into your own child’s account? Proposed regulations issued August 11, 2026, make the answer turn on your choice of entity. 

Sole Proprietorship 

The proposed regulations define “employee” under the common-law standard and exclude self-employed individuals—partners, sole proprietors, directors acting solely as directors, and 2 percent S corporation shareholders. You may sponsor a program for your employees, but you may not participate in it. 

Your child-employee is a different person. The program may contribute to a Trump Account whose beneficiary is in his or her “growth period” and is “an employee” or an employee’s dependent. Your under-18 child on the payroll of your proprietorship or spouse partnership is in the growth period and is a common-law employee in his or her own right. 

Planning point. You need a written plan that does not discriminate in favor of highly compensated employees. Your child could be “highly compensated” based on your income because of the attribution rules. 

Bonus. Employer contributions escape income tax but remain FICA and FUTA wages. For most employers that is a real cost. But not for you as a sole proprietor or as a spouse partnership because wages to your under-18 child are already exempt from FICA and FUTA. 

In a proprietorship there is no stock and nothing to attribute, so nothing in the proposed regulations makes that child a self-employed individual. 

S Corporation 

A 2 percent shareholder is defined using the Section 318 attribution rules, which attribute a parent’s stock to a child. Your child on the S corporation payroll is treated as a 2 percent shareholder and is not an employee for this purpose. Your spouse fares no better. 

Beware. These are proposed rules for Trump Accounts. You may rely on them now, but the comments period runs to September 25, 2026, and a hearing is set for October 15, 2026. The proposed rules don’t address whether the owner’s child qualifies as an employee, so double-check before you build the plan. 

How Young Can Your Hired Child Be? 

Tax law has no minimum age. The IRS approved the hiring of a seven-year-old in its acquiescence to the Eller case.

Mr. and Mrs. Eller owned and operated mobile home parks. They hired their three children, who were 7, 11, and 12 years old. In its acquiescence, the IRS noted the following:16 

• Compensation is deductible only if it is reasonable in amount, actually paid, and based on services actually rendered. 

• The fact that payments are made to minor children by their parents does not preclude deducting the payments. 

The acquiescence in this case means that the IRS accepts the holding of the court and that the IRS will follow the court’s decision in disposing of cases with the same controlling facts. It does not indicate approval or disapproval of the reasons assigned by the court for its conclusions.

This means that you need proof the amount you pay your child is a reasonable amount for the services rendered. 

Child Labor Laws 

Parents employing their children are mostly exempt from the labor laws. 

The Fair Labor Standards Act provides that children younger than age 16 working in a business solely owned by their parents (or by persons standing in place of their parents) can work at any time of day and for any number of hours.

But parents are prohibited from employing their child in manufacturing or mining or occupations that involve the following activities declared hazardous by the Department of Labor:

• • • Manufacturing and storing of explosives 

    • Driving a motor vehicle and being an outside helper on a motor vehicle (other than the delivery of newspapers to consumers where youth are exempt from the labor laws) 

    • Logging and sawmilling 

    • Working with power-driven woodworking machines 

    • Being exposed to radioactive substances 

    • Working with a power-driven hoisting apparatus 

    • Working with power-driven metal-forming, punching, and shearing machines · 

    •  Meatpacking or meat processing (including the use of power-driven meat-slicing machines) · 

    • Working with power-driven bakery machines 

    • Working with power-driven paper product machines, including scrap-paper balers and paper-box compactors 

    • Manufacturing brick, tile, and related products 

    • Working with power-driven circular saws, band saws, and guillotine shears 

    • Wrecking, demolition, and ship-breaking operations 

    • Roofing operations and all work on or about a roof 

    • Excavation operations 

If you want to employ your child in one of the above hazardous occupations, check the exemptions that might apply, by going to https://www.dol.gov/agencies/whd/fact-sheets/43-child-labor-non-agriculture. 

Count on Extra Scrutiny 

The courts note that wage and salary payments from a father or mother to one or more of their children require careful scrutiny.

In Denman, the court noted that when it’s a family relationship, the court needs to take a close look to make sure there is both

• a bona fide employer-employee relationship, and · 

• a performance of services for the business. 

Planning tip. Make sure that you pay a reasonable wage based on a time sheet submitted in a timely manner. 

Forget Food and Lodging 

In the right circumstances, it is possible to build tax deductions for food and lodging furnished to an employee. That’s not going to happen with your minor-age children, because as the parent you are legally liable for their support and maintenance. 

Build Audit-Proof Support 

1. Get an employer ID. When you become an employer, you need an employer ID number. You can apply for your employer ID number online, by fax, or by snail mail (no telephone applications for United States applicants). When you apply online, the IRS will assign a number immediately. 

• To apply online, click here. 

• To apply by fax: Fax Form SS-4, Application for Employer Identification Number to 855-641-6935. If you apply by fax and provide a fax number, the IRS will fax a cover sheet with the EIN back to you in about four business days. 

2. Require a time sheet. The handwritten time sheet is excellent proof. Your child should complete the time sheet daily and turn it in weekly. 

We have created a time sheet that you can use. For access, click either PDF or Excel format. 

You should have your child complete a time sheet to help prove that he or she did the work. Vernon E. Martens hired his two sons and two daughters, but he lost about 80 percent of the payroll deductions he claimed for hiring his four children because he did not require time sheets.

3. Document the pay scale. If you are paying your child minimum wage, you don’t have to worry about documentation of the pay rate. But you probably want to pay at a higher rate. This requires proof that the rate you are paying is a reasonable rate for this type of employment. 

Let’s say you used to pay a website developer $75 an hour to set up your web pages. Let’s say your son can do this work, but it takes him about twice as long. You have to think that an hourly rate of less than $37.50 is reasonable for the son. The key here is documentation of how you arrived at your reasonable rate of pay. 

4. Pay with a W-2 payroll check. Always pay wages by W-2 payroll check. The W-2 wage is what exempts the under-age-18 child from payroll taxes when working for a parent. 

Also, you need to establish a clear audit trail from your business checkbook to your child’s bank account. Remember, when you pay your child, this is now your child’s money. 

If you use a payroll service, make sure to explain to the service that your child is exempt from payroll taxes, and then make sure to check the payroll. Often, payroll services mistakenly withhold FICA from the child when they should not. (Note: A few states so not exempt the parent’s proprietorship or partnership business from state imposed unemployment taxes on the child.) 

5. Complete the federal and state payroll forms. Your federal paperwork includes the forms below. To obtain one of the forms, click here. 

· 

IRS Form W-4. Your employee-child uses this form to tell you, the employer-parent, how much to withhold. The form no longer uses withholding allowances. A child who expects to owe no federal income tax can claim exempt status by writing “Exempt” below Step 4(c). That claim expires every year on February 15, so this could be an annual event for many years. 

· 

IRS Form W-2. If you paid your child more than $600 in wages, you must provide your child with a copy of IRS Form W-2. You also must file IRS Form W-3 and copies of the W-2s with the Social Security Administration. 

· 

IRS Form 941. You report withholding, FICA on this form. Remember, wages paid by the mother or father to the under age 18 child are exempt from FICA. That’s nice, but even when no taxes are due, this form is due. Your dealings with the IRS are easiest if you file each quarter, even if you are eligible for seasonal filing. The IRS computers like to see a Form 941 every quarter. 

· 

IRS Form 940. The wages you pay your under-age-21 child are exempt from unemployment taxes. Even so, you must file IRS Form 940. If your child is your only employee, you enter the amounts paid to your child as both (1) gross pay and (2) exempt pay, making a net payment of zero subject 

Key point. Use a payroll service to make payroll compliance easy. Your tax professional can help you here. 

Do the Paperwork or End Up Like This Lawyer Mom 

Failing to follow the documentation steps can blow up on a parent. Lisa Fisher learned this the hard way. 

Lisa practiced law as a sole proprietor and sometimes brought her three children (all under age nine) into her office. The kids usually worked at the office two or three days a week for about two hours each day. They shredded confidential and other paper, sent out mail, answered phones, and performed other services connected to their mom’s law practice. 

Lisa claimed deductions in the three years before the court of $10,435, $10,313, and $8,022 for the wages she paid to her children. The IRS disallowed the deductions, and Lisa, lawyer that she was, took her case to court.

Bad call on her part—not only did Lisa lose out on the wage deductions, but she also got dinged with negligence penalties. 

Lisa made three big mistakes that cost her the claimed deductions: 

1. She didn’t issue her children W-2 forms. 

2. She didn’t keep payroll records of any payments to her children. 

3. She didn’t have any documentary evidence (for example, canceled checks for payments to the children, time sheets showing hours worked, or the rate of pay per hour). 

Without such evidence, the court came up with its own amount for the deductions—a meager $250 for each child for each year. Not quite the generous deductions Lisa had hoped for. 

Worse, she ended up on the hook for penalties because her resulting understatement of taxes exceeded $5,000 for each year. Even if the understatement were less, the court said, Lisa had to pay the penalties because her failure to keep adequate books and records related to the kids’ pay was negligent. 

Takeaways 

If your children do not pay income taxes, they are excellent candidates as employees for your business regardless of business form: 

• The children pay zero federal taxes on earnings up to the $16,100 standard deduction amount. · 

• They can use a traditional IRA to avoid taxes on another $7,500, giving them a total of $23,600 on which they can avoid taxes. 

• They can use the 10 percent tax bracket, standard deduction, and traditional IRA so as to pay itty bitty taxes on earnings up to $36,000. 

• To get this right, you need to pay the child on a W-2, have the child keep a time sheet, and create proof of a reasonable wage. The IRS has approved employing children as young as seven years old. 

If the children working for a parent are under age 18, both the children and the parent(s) are exempt from payroll taxes. In these cases, the parent operates a Schedule C business or both parents are the sole owners of a partnershipCorporations are not parents. They do not qualify for this exemption from payroll taxes. Even so, corporate hires of the owner’s children usually produce good tax benefits. 

All business owners can achieve tax benefits by hiring their children, regardless of the type of business entity. But parents who are Schedule C owners or in spousal partnerships achieve more benefit because neither they nor their under-age-18 children are subject to payroll taxes. 

Three more points for 2026: 

1. Remember the Section 199A haircut. The wages reduce your qualified business income, so figure the federal income tax savings at somewhat near 80 percent of your bracket. Above the Section 199A thresholds, though, the wages can help you by raising your W-2 wage limitation. 

2.  Favor the Roth. A child paying zero federal tax gets nothing from a deductible traditional IRA. Instead consider a Roth IRA for the child. 

3.  Thump Account. If you operate as a proprietorship, consider the Trump Account for a $2,500 tax deduction for you and no federal taxable income for your employee-child.