How to Pay Your Kids Through Your Business — Legally — and Move $16K+/Year Off Your Tax Return in 2026
This is one of the most-asked questions in our office. It's also one of the most-botched strategies in the small-business world, because half the content written about it online is wrong, and the other half is so cautious it misses the actual opportunity.
So let's do this properly. By the end of this post you'll know exactly how to pay your kids through your business under the rules in effect for 2026, how much you can move, what documentation you need to survive an audit, and how to stack a Roth IRA on top to turn this from a tax move into a generational wealth move.
The Basic Mechanic
If you have a kid and a business, you can hire that kid. When you do:
• The wages you pay are a deductible business expense on your return — reducing your taxable income at your marginal rate (potentially 24%, 32%, or 37%).
• The wages are earned income to your child, taxed at their rate — which is zero up to the standard deduction.
For 2026, the standard deduction for a single filer (which your kid is) is approximately $16,100. That means you can pay your child up to roughly $16,100 in wages and they owe zero federal income tax on it. You deduct it. They don't pay it. The money moved from your tax return to theirs and got taxed at 0%.
If your marginal rate is 32%, paying your kid $16,100 saves you roughly $5,150 in federal tax. State tax savings are on top of that. (Verify the exact 2026 standard deduction with your CPA before relying on this — the IRS publishes the inflation-adjusted figure each fall.)
The Payroll Tax Twist That Makes This Even Better
This is the part most articles get wrong.
If your business is a sole proprietorship or a partnership where both partners are the child's parents, wages paid to your own child under age 18 are exempt from Social Security and Medicare taxes (FICA), and exempt from federal unemployment (FUTA) until age 21. See IRC §3121(b)(3)(A) and §3306(c)(5).
That means no 15.3% payroll tax on either side. The full deduction flows. Pure savings.
If your business is an S-corp or C-corp, this exemption does not apply. The corporation is a separate legal person from you, so the family-member exemption breaks. You still get the income-tax savings, but you owe FICA on the wages — which significantly reduces the benefit.
The workaround for S-corp owners: set up a separate family management company as a sole proprietorship or partnership owned by you and your spouse. The S-corp pays the management company a fee. The management company hires the kids. The wages flow through a structure that does qualify for the FICA exemption.
This is a real strategy, used constantly, but it has to be set up correctly with actual services rendered and a reasonable management fee. Done sloppily, the IRS will collapse the structure. Done properly, it's defensible and powerful.
Don't Forget the QBI Impact
One honest caveat. The wages you pay your kids are a deductible expense that reduces your QBI — so the immediate tax savings on the wages get partially offset by a smaller 20% QBI deduction. Net-net, paying your kid $16,100 still saves you real money, but at a 32% marginal rate the actual federal savings net of QBI impact is more like $3,500–$4,100 depending on your situation, not the full $5,150. That's still a great return for letting your kid do real work — and the Roth IRA stacking move below makes the strategy worth doing even before the tax savings come in.
Age Limits — What Kids Can Actually Do
You can't pay your three-year-old $16,000 to "model" for your website. Well, you can — and people do — but you will lose that audit. The IRS and the Tax Court have been clear: the work has to be real, age-appropriate, and necessary to the business.
• Ages 11–14: managing social media accounts, basic graphic design, organizing inventory, customer service in family businesses, helping with deliveries. Realistic comp: $8,000–$14,000/year.
• Ages 15–17: real employee work — bookkeeping assistance, sales support, website management, content creation, full-on operational roles. Realistic comp: up to the full standard deduction (~$16,100 in 2026), sometimes more if the work justifies it.
The test is always: would you pay an unrelated person this amount to do this work? If a 9-year-old shredding paper a few hours a week for $7,000 sounds defensible, that's because it is. A 9-year-old "consulting on strategy" for $14,000 is not.
The Documentation That Actually Matters
This is where most owners get sloppy and where audits get won or lost.
You need, at minimum:
- A written job description. Tasks, hours, hourly rate. Sign and date it.
- Timesheets. Real ones. What was done, when, for how long. Weekly is fine. A spreadsheet works. Excuses don't.
- A real W-2. Run it through payroll like any other employee. If you use a payroll service (Gusto, QuickBooks Payroll, ADP), add the kid as an employee.
- Payment to a bank account in the child's name. Not yours. Not "for them." Theirs. This is where most strategies collapse — the parent keeps the money and the IRS treats it as a sham.
- The child must actually receive and control the money. You can require them to save it, you can guide what they do with it, but the funds are legally theirs.
Skip any of these and you are gambling. Do all five and you have a structure that wins audits.
The Roth IRA Stacking Move
Now the part that makes this a wealth strategy, not just a tax strategy.
Earned income is what makes someone eligible to contribute to a Roth IRA. Your kid, suddenly earning wages, is now eligible. The 2026 Roth contribution limit is $7,500 (or the kid's total earned income, whichever is less).
So picture this: you pay your 15-year-old $16,100 to do real work in your business. She owes zero federal tax on it. She contributes $7,500 to a Roth IRA in her name. You and she now decide together what she does with the remaining $8,600 — maybe she uses it for clothes, activities, and savings, things you were paying for anyway out of after-tax dollars.
Do this every year from age 15 to 22. That's $7,500/year × 8 years = $60,000 contributed to a Roth IRA. At a 7% real return, by the time she's 65, that account is worth approximately $1.4 million — all tax-free.
You moved $16,100/year off your tax return, saved several thousand in federal income tax (plus state, plus payroll taxes if you're structured right), funded your kid's retirement with seven-figure tax-free potential, and taught them how a paycheck works.
That's the move.
What To Do This Week
Three concrete steps.
First, decide whether your entity structure works as-is or whether you need a management company. If you're a sole prop or partnership with your spouse — you're good. If you're an S-corp or C-corp with kids under 18, we should talk about whether a management company makes sense.
Second, write the job description and start the timesheet before you cut the first check. Backdated documentation is the single fastest way to lose an audit.
Third, open a custodial Roth IRA at Fidelity, Schwab, or Vanguard — they all offer them free, and the setup takes about 20 minutes.
If you want help structuring this properly for your specific situation, send me your entity type and your kids' ages and I'll tell you exactly how much you can move, what structure makes sense, and what the documentation needs to look like. Twenty-minute call, no charge.
The kids you hire today are funding the retirement they'll thank you for in fifty years.