6 Ways Hiring Your Kids Can Cut a Family Business's Tax Bill
Sam's List Editorial | 2026-06-23
6 Ways Hiring Your Kids Can Cut a Family Business's Tax Bill Here's a deduction most family business owners are sitting on and never use: their own kids. If your child is already stuffing envelopes, shredding files, or running your Instagram, you're paying them in pizza and screen time. The hiring your kids tax strategy says pay them in actual W-2 wages instead — and the IRS hands you a deduction, your kid a near-tax-free paycheck, and your family a head start on a Roth IRA that compounds for 50 years. The catch is that it only works if the work is real and the paperwork is real. Get sloppy and an auditor will unwind the whole thing. Done right, it's one of the cleanest moves a bootstrapped founder has. Here are six ways the hiring your kids tax strategy lowers what your family business owes. 1. The hiring your kids tax strategy moves income to an empty bracket This is the engine. Every dollar you pay your child is a dollar your business deducts as a wage expense — and a dollar that lands in your child's tax return instead of yours. The math: a sole proprietor in the 32% federal bracket who pays a child $10,000 for legitimate work knocks roughly $3,200 off the family's federal tax bill, before state tax. The work that used to be free family labor is now a business deduction. Your kid, meanwhile, almost certainly owes nothing on it. Which brings us to the part that surprises people. 2. The standard deduction can make those wages tax-free to your child A dependent who earns wages gets to use the standard deduction against earned income. For 2026 that standard deduction is $16,100 for a single filer. So a child with no other income can earn up to that amount in W-2 wages and owe zero federal income tax on it. You deducted the wages at your rate; your kid received them at a 0% rate. That spread is the whole point of employing children for business tax purposes. Most families don't push the number anywhere near $16,100 — but even $8,000 to $10,000 of genuine work moves real money. 3. A sole prop or spousal partnership skips Social Security and Medicare tax Here's the part nobody tells you. Under IRC §3121(b)(3)(A), wages a sole proprietorship — or a partnership where both partners are the child's parents — pays to a child under 18 are exempt from Social Security and Medicare tax (FICA). That's 15.3% of combined payroll tax that simply doesn't apply. And under IRC §3306(c)(5), those wages are also exempt from federal unemployment tax (FUTA) until the child turns 21. One caveat that costs people thousands: this exemption does not apply to S corporations or C...
