Employing Your Children in Your Business: Tax Benefits, Rules, and Planning Tips

For small business owners, hiring your children can provide significant tax savings for both your business and your household. You can fully deduct the wages paid to your children as a business expense just like you do with any other employee, lowering your overall taxable business income. The wages you pay to your child are then taxed at their lower federal income tax rate. There are strict rules regarding legitimate work, reasonable pay and labor laws that must be followed both federally and at the state level. However, the benefits vary depending on the business structure with sole proprietors and partnerships where only the parents are partners reaping the most reward.  In addition to the tax advantages, your children can gain valuable work experience and potentially get a jump start on their retirement.

Your child will need to file their own Form 1040 to get any income taxes paid refunded to them. Children claimed as dependents can deduct as their standard deduction $1,350 OR earned income plus $450, up to $16,100 for single filers in 2026.  This means that up to $16,100 of the wages you pay to them are not taxed at the federal level. Any wages the child earns over the $16,100 standard deduction would be taxed at their comparatively lower tax bracket. This enables your household to minimize its overall tax burden by shifting income from your relatively higher tax bracket to their lower one.  Let’s look at some examples.

• ‍Example 1: If your dependent child has $700 in earned income, their standard deduction would be $1,350.  $700 + $450 = $1,150, which is less than the standard deduction of $1,350 so they would use the higher amount.‍
• Example 2: If your dependent child has $15,000 in earned income, their standard deduction would be $15,450 ($15,000 + $450). Since $15,450 is greater than $1,350 but less than $16,100 (the standard deduction for a single filer), they would claim the $15,450 standard deduction.‍
• Example 3: If your dependent child has $17,000 in earned income, their standard deduction would be limited to $16,100 (the standard deduction for a single filer). In this case, they would pay tax at their lower rate on the remaining $900 ($17,000 - $16,100). 

If your business is a sole proprietorship or partnership where only the parents are partners, there are payroll and unemployment tax benefits in addition to the income tax savings for employing your child.  Wages paid to a child under age 18 are exempt from Social Security and Medicare (FICA) taxes.  Wages paid to a child until age 21 are exempt from federal unemployment (FUTA) taxes.  It is important to point out that these benefits only apply to sole proprietorships and partnerships where only the parents are partners.  For other types of businesses, payments to your children for services are subject to income tax withholding, FICA taxes (EE & ER) and FUTA taxes, regardless of age.  Workers’ compensation coverage requirements are dictated at the state level and vary widely.

IRS Requirements for Hiring Your Child

Under IRS compliance rules, to qualify for these benefits, the arrangement must be a bona fide employment relationship.  This means that the following standards apply:

• Your children must perform work that is necessary for your business, and the job duties must be age-appropriate and suit your child.  You can’t pay them to do chores around your house or say your eight-year-old keeps your books and claim that work as a business expense, for example.
• You must pay your child reasonable wages.  Excessive pay may be flagged and trigger an IRS audit.  You should pay your child the same amount that you would pay any other employee performing the same duties.
• You must follow all employment laws, file all required employment forms such as quarterly Form 941s and annual Form W-2s and withhold and remit any required taxes. 
• You must maintain detailed payroll records for your child including Form W-4, Form I-9, detailed timesheets and all payments made to your child.  Avoid paying your child in cash.  Ideally, you should put the child on payroll.

There is no federal age requirement for hiring your child, however they must be able to perform duties necessary for your business.  Under the Fair Labor Standards Act (FLSA), children of any age can generally work for a parent-owned business as long as it’s not in a hazardous industry such as mining or manufacturing. However, state laws are much more stringent regarding working hours and age limits for your children. Whichever rules are most protective to the child must be followed.

For 2026, a child with earned income can contribute that income, up to $7,500 per annum, to a custodial ROTH IRA, getting a jump start on retirement savings. These contributions could potentially be completely tax-free if the child’s earned income is below the standard deduction threshold for their tax filing status.  For most children, this would be the full $7,500 since the 2026 standard deduction for a single filer is $16,100.  This would enable their contributions to grow completely tax-free and qualified withdrawals (not until age 59 ½) to also be tax-free.  This means they would never pay federal income taxes on this income.  This is the best way to minimize total taxes, but the caveat is that they wouldn’t be able to access the money for a substantial amount of time, not until the child attains age 59 ½. 

Hiring your children in your business provides substantial tax savings for both your business and your household.  There are many intricacies and strict rules involved in this practice, however, so please reach out to HHM CPAs and let us know how we can assist you in this endeavor.    

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