Published on Feb 24, 2026 • Updated on Sep 3, 2026
This article was written by Salvatore M. Capizzi
Salvatore M. Capizzi, CEPA, CBDA, is Dunham's Chief of Sales & Marketing and a 2026 Wealthies CMO of the Year Finalist. His work focuses on retirement planning, emerging trends for financial advisors, and advanced tax, trust, and estate strategies.
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Hiring your child in your small business can legally cut your tax bill while jumpstarting their financial future. You get a full wage deduction, they may owe no federal income tax up to the standard deduction, you can often avoid payroll taxes, and their earned income can fund a Roth IRA.
Last week, I had a conversation with a financial advisor that reminded me of one of the most powerful - and most overlooked - tax benefits available to small business owners today.
This strategy is not hiding in the tax code.
It is hiding in your house, eating your food, ignoring your texts, and contributing absolutely nothing to the household budget.
Until now.
The tax benefits of hiring your child in your business are real, substantial, and completely legal. Pay your child a fair wage for real work, and your business gets a deduction that lowers your taxable income. Your child gets tax-free earnings. And if you're thinking ahead, you can use those earnings to jumpstart their retirement savings before they're old enough to drive.
They might even learn something about the family business along the way.
Now, before you panic, I am not talking about Oliver Twist here. Nobody is sending little Oliver to the workhouse to look up from a filing cabinet and say, "Please, sir, I want some more." The IRS does not set a minimum age for hiring your own children, and unlike a local machine shop looking to hire your daughter as a welder, you are actually allowed to put your 12-year-old to work.
We are talking about sorting files, tidying the office, managing social media - and let us be honest, they are probably better at that last one anyway.
The concept is straightforward. When you pay your child for work performed in your business, those wages are deductible business expenses - no different from any other employee's salary. You are shifting income from your higher tax bracket into your child's hands, where it may not be taxed at all.
That is because every taxpayer is entitled to a standard deduction.
In 2026, that amount is $16,100 for a single filer. And since your child likely has no other income, they can earn up to that full amount without owing a dime in federal income tax.
But wait, there is more.
Not only does the income shift from your higher bracket to your child's potential zero percent bracket, but your business also receives a full tax deduction - just as it would for any other employee's wages.
Here is a quick example. Assume you pay your child $15,000 in 2026 for age-appropriate work, such as:
Your child owes zero federal income tax because $15,000 falls below the $16,100 standard deduction. Meanwhile, your business deducts the full $15,000 - potentially saving you thousands depending on your marginal tax rate. The tax benefits of hiring your kids add up quickly.
Now it gets better.
If you are a sole proprietor and hire a child under 18, wages paid are exempt from Social Security and Medicare taxes (FICA) and federal unemployment tax (FUTA). This is the family employment tax exemption - one of the biggest advantages available to small business owners.
This is a significant advantage. Usually, employment taxes add 15.3% on top of the income tax cost of paying a worker:
When your minor child is on the payroll, neither party owes FICA, so you keep the full 15.3% in self-employment tax savings. For a sole proprietor looking to avoid self-employment tax, hiring your child is one of the most effective and legal ways to do it.
This FICA exemption for a minor child also applies to partnerships in which both partners are the child’s parents. However, once your child turns 18, Social Security and Medicare taxes kick in, and FUTA applies once they reach 21.
But even if the FICA tax applies after age 18 and the FUTA tax after age 21, the tax savings from hiring kids in a sole proprietorship still represent a meaningful benefit.
If your business is structured as an S corporation, C corporation, or a multi-member LLC with non-parental partners, the payroll tax exemptions for minor children do not apply. Wages will be subject to standard income tax withholding, FICA, and FUTA regardless of age.
That said, the business still deducts the wages as an ordinary business expense, and your child still benefits from the standard deduction - effectively sheltering their income from federal tax. The core tax benefits of hiring your child remain intact even in these structures.
If your current structure does not qualify for the FICA and FUTA exemptions, there is a legitimate planning strategy worth discussing with your CPA.
Let us say you have set up your business as an S corporation, which is one of the most common structures for small business owners. Consider establishing a separate sole proprietorship or single-member LLC that provides management or administrative services to the main business. Your child can be paid through that entity, potentially qualifying for the FICA and FUTA exemptions.
This is a legitimate planning strategy, but it should be set up with guidance from a tax professional to ensure it withstands IRS scrutiny. Can you hire your child in your small business through a separate entity? Yes, but do it right.
You would think a tax nerd like me would be happy to end here.
But here is a benefit many parents overlook entirely. Remember, because wages count as earned income, paying your child opens the door to funding a custodial Roth IRA in their name with that income.
There is no minimum age requirement. Your child simply needs earned income and a Social Security number.
A Roth IRA is particularly powerful for your young child, as it can kick-start their financial future.
Contributions are made with after-tax dollars, but since the standard deduction likely shelters your child’s income, they are effectively contributing tax-free money that could grow tax-free for decades.
While the Roth IRA helps fund their retirement, as a parent, I love that it can also be used for qualifying expenses like a first home purchase, education costs, or starting a family. All of these expenses are tax-free, giving them a head start as they enter adulthood.
The annual contribution limit is the lesser of the child’s earned income or the IRS cap, which is $7,500 in 2026 and is adjusted annually for inflation. Even modest contributions made during childhood can grow into substantial sums over 40 or 50 years of compounding. A $5,000 annual Roth IRA contribution starting at age 12 could be worth hundreds of thousands of dollars by retirement age without a single dollar owed in taxes.
To capture the full tax benefits, the arrangement must meet IRS requirements. Wages must be:
You cannot write your child a check as a disguised gift. The IRS will disallow the deduction if the work is not real or the pay is not reasonable.
Also note: while the IRS sets no minimum age, state labor laws may have their own requirements. Federal income tax withholding is still required from your child's paycheck - but it is fully refundable when they file their return if total income falls below the standard deduction.
Hiring your child is one of the few tax strategies that benefits everyone involved.
Actually, as I finish writing this, I realize this strategy does not benefit everyone involved.
It seems to me that the big loser in all of this is the IRS. Your child gets a tax-free income. Your business gets a deduction. Their retirement savings start compounding before they can even vote. And the IRS receives, well, less.
Come to think of it, maybe this whole thing is a bit like Oliver Twist after all, except this time, it is the IRS looking up from an empty bowl saying, “Please, sir, I want some more.”
How much can I pay my child tax-free in 2026? A child with no other income may generally earn up to $16,100 in wages in 2026 without owing federal income tax, because that is the standard deduction for a single filer. The child may still owe payroll taxes in some business structures, and state income-tax rules can differ. Wages are deductible to the business only when the work is real, the compensation is reasonable, and the expense is ordinary and necessary for the business.
Do I have to pay FICA and FUTA taxes if I hire my child? If a child works for a parent’s sole proprietorship, or for a partnership in which each partner is the child’s parent, wages paid to a child under age 18 are generally exempt from Social Security and Medicare taxes. Wages paid to a child under age 21 are generally exempt from federal unemployment tax. These exemptions generally do not apply when the business is a corporation, including an S corporation or C corporation, or when a partnership includes a partner who is not the child’s parent. Income-tax withholding rules may still apply.
Can my child contribute to a Roth IRA if I hire them? Yes. A child with taxable compensation from legitimate work may contribute to a Roth IRA, subject to the lesser of their taxable compensation or the annual IRA contribution limit. The 2026 limit is $7,500 for individuals under age 50. A Roth IRA contribution is made with after-tax income, and qualified distributions can be tax-free if federal requirements are met. Roth IRA income limits may apply in some circumstances.
What work qualifies for the tax benefits of hiring your child? The child must perform real, age-appropriate work that is necessary for the business. Examples may include filing, data entry, social-media assistance, photography, cleaning a business workspace, inventory support, or helping at events. Pay should be reasonable for the work performed and comparable to what the business would pay an unrelated worker. Keep a job description, timesheets, payroll records, proof of payment, and a Form W-2 when the child is an employee. A tax professional can help confirm the proper treatment for the business structure and state involved.
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax, or investment advice or an investment recommendation, or as a substitute for legal counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy, or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.
Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA/SIPC. Advisory services and securities offered through Dunham
