If you are searching for a hiring kids tax strategy that actually holds up, the concept is simple. You put your child on the payroll for real work. You deduct the wages as a business expense. Because a single filer in 2026 gets a standard deduction of $16,100, your child pays zero federal income tax on earnings up to that amount. The money leaves your business account, reduces your taxable profit, and lands in their bank account. I have run this setup for contractors and trades businesses repeatedly. The savings are real when the entity type and paperwork are right.

How much can you pay your child in 2026 before they owe federal income tax?

If your child earns $16,100 or less in wages, and they have no other significant income, their federal taxable income is generally zero. That is the standard deduction for a single filer in 2026 under IRC §63(c). You still deduct the full amount on your business return. The income moves from your tax bracket to theirs. You deduct $16,100 in wages. That amount comes out of your taxable income. Wages are one of the most reliable tax write-offs for contractors. If your marginal federal rate is 24%, the savings are roughly $3,864. Your child owes nothing on the same dollars.

Does your business type change the payroll tax bill?

Yes. This is the most important detail. If you operate as a sole proprietorship, or as a partnership where both partners are the child's parents, wages paid to a child under 18 are exempt from FICA tax under IRC §3121(b)(3)(A). The employer and employee shares of Social Security and Medicare both disappear. The FUTA exemption for children under 21 comes from IRC §3306(c)(5). A sole proprietor's own net profit is subject to self-employment tax, but an exempt child's wages skip the parallel FICA layer entirely. If you operate as an S-Corporation or C-Corporation, you do not get those exemptions. You pay the employer share of FICA. The child pays the employee share. That employer share is part of what makes a W-2 hire cost more than a 1099 sub; see our breakdown of what a W-2 employee really costs. The strategy still works, but the payroll tax friction cuts into the savings. If you are weighing an entity change, see our breakdown of LLC vs S-Corp for contractors.

What kind of work actually qualifies for the deduction?

The work must be ordinary and necessary for your business under IRC §162(a). The wage must be reasonable for the task. A twelve-year-old can organize tools, clean vehicles, scan receipts, or answer phones. A sixteen-year-old can perform basic bookkeeping, run errands, or help with jobsite prep. You cannot deduct an allowance for household chores. The IRS looks for timesheets, a written job description, and payment by check deposited into an account in the child's name. If you are expanding beyond family, see our look at cost employee turnover for contractors, since every hire affects your labor cost structure.

Do you have to issue a W-2 and run payroll?

Yes. Even your own child gets a Form W-2 if they are an employee. In January, you issue the W-2 showing total wages paid. If they are exempt from FICA because you are a sole proprietorship and they are under 18, boxes 3 and 5 on the W-2 will show zero Social Security and Medicare wages. You still file Forms 941 and 940 as required, but the exempt wages are not subject to those taxes. Do not pay cash under the table. That is not a deductible wage. It is a gift, and gifts to your children are not business expenses. Your child must be a W-2 employee, not a 1099 subcontractor. See our comparison of employees or 1099 subs.

Can their wages go straight into a Roth IRA?

Yes. This is where the strategy becomes generational. To contribute to a Roth IRA, a person needs earned income. In 2026, the IRA contribution limit for someone under 50 is $7,500. If your child earns at least that much, they can contribute the full amount to a Roth IRA. They get decades of tax-free growth. If they earn the full $16,100, they can max out the Roth and still have spending money left over. All of it can be federal-income-tax-free (IRC §219/§408A).

What happens if the IRS challenges the wages?

You win if the work was real and the pay was reasonable. The IRS examines exactly those two facts. Keep a timesheet showing dates and hours worked. Maintain a one-page job description drafted before they start. Pay by check from the business account. Deposit it into an account in the child's name. The hourly rate should match what you would pay a stranger. If local office help earns $16 per hour, pay your child $15 or $16 per hour. Not $50. Not in cash. Good records win every time and keep you off the common list of what flags a contractor return.

What is the short version for a busy contractor in 2026?

If you are a sole proprietor or parent-only partnership, hire your child for real work. Pay up to $16,100 in 2026. Deduct it. They pay zero federal income tax. You avoid FICA if they are under 18. You avoid FUTA if they are under 21. Fund a Roth IRA with up to $7,500 of their earnings. Keep timesheets and pay by check. That is the entire strategy.

Want to put your kids on payroll without triggering a payroll tax surprise? We help contractors and trades owners set up family payroll that deducts properly, files clean, and holds up if the IRS asks. Book a meeting with our team here.