Hiring Your Kids: Legal Ways to Save on Taxes

Why Paying Your Children for Work in Your Business Deserves Serious Attention

If you are a small-business owner, a self-employed professional, or a real estate investor, you are probably already looking for legitimate ways to reduce your federal tax burden. One strategy that often gets overlooked — or misapplied — is employing your own children in your business.

Done correctly and with the right business structure, this approach may allow you to deduct wages your child earns as a legitimate business expense, potentially reducing your taxable income at your marginal rate. In certain situations, those same wages may be taxed at a significantly lower rate — or not at all — in your child's hands.

In my more than 15 years working in taxes, accounting, finance, and with business owners, I have seen this strategy save families meaningful amounts of money when it is applied properly. I have also seen it blow up in an audit when it was done carelessly. The IRS pays close attention to family employment arrangements. The rules are not complicated, but they require strict adherence.

How Does the Family Employment Tax Rule Actually Work?

The legal foundation for this strategy comes from the Internal Revenue Code, which generally allows a business to deduct ordinary and necessary business expenses — including reasonable wages paid to employees — under IRC Section 162. There is no blanket rule prohibiting you from hiring a family member. What the IRS requires is that:

• The child actually performs real, legitimate work for your business.
• The wages paid are reasonable and comparable to what you would pay an unrelated third party for the same work.
• The work arrangement is documented and the payments are made as genuine compensation.
• You comply with applicable labor laws, payroll withholding requirements, and reporting obligations.

When those conditions are met, the wages your business pays your child are generally deductible to the business. The child reports those wages as earned income on their own tax return.

The Payroll Tax Exemption for Sole Proprietors and Certain Partnerships

Here is where the entity structure matters enormously. Under IRC Section 3121(b)(3)(A), wages paid by a sole proprietor to a child under age 18 are generally exempt from Social Security and Medicare taxes (FICA). The same exemption applies when the business is a partnership in which each partner is a parent of the child employed.

This exemption does not apply to wages paid by corporations — including S corporations — or to LLCs taxed as corporations, or to partnerships with non-parent partners. In those structures, FICA taxes apply to your child's wages just as they would for any other employee.

Federal Unemployment Tax (FUTA) under IRC Section 3306(c)(5) is also generally exempt for wages paid to a child under age 21 by a sole proprietor parent, and for certain partnerships of parents. Again, this exemption does not extend to corporate structures.

Who May Qualify to Use This Strategy?

This strategy may be available to you if:

• You operate a business as a sole proprietor (Schedule C filer), and you have a child under 18 — or under 21 for FUTA purposes.
• You operate a partnership where every partner is a parent of the child being employed.
• You operate a corporation, S corporation, or multi-member LLC and you want to employ your child — understanding that FICA taxes will apply but the wage deduction may still be valuable.
• Your child is capable of performing genuine, documentable work that is useful to your business.
• You are willing to treat the employment relationship professionally: job description, time records, payroll deposits, and W-2 issuance.

Who Is Not Eligible, or Where the Strategy May Not Produce the Expected Result?

• Parents who employ their child through an S corporation or C corporation do not get the FICA exemption — full payroll taxes apply.
• A parent who overpays their child relative to the fair market value of the work performed risks the excess being recharacterized and disallowed.
• Business owners who do not issue a W-2 to the child, withhold taxes correctly, or make payroll deposits on time may face penalties separate from any deduction dispute.
• Children employed in hazardous occupations subject to federal or state child labor restrictions cannot be employed in those roles regardless of tax benefits.
• If the child's wages are simply funneled back to the parent or used to pay the parent's personal expenses, the IRS may treat the arrangement as a sham.

What Are the Applicable Dollar Limits and Tax Thresholds?

For the 2025 tax year, the standard deduction for a single filer was $15,000. The 2026 standard deduction will be set by the IRS based on inflation adjustments and will be published before the 2026 filing season opens. Once announced, this figure represents the threshold below which a child with only earned income generally owes no federal income tax and may have minimal filing requirements.

If you pay your child wages up to approximately the annual standard deduction amount and the child has no other significant income, the child may owe little or no federal income tax on those wages. At the same time, your business deducts the full wage amount at your marginal rate. That is the core of the tax benefit.

The "kiddie tax" under IRC Section 1(g) applies to unearned income (such as dividends, interest, and capital gains) of certain children and dependents. Wages earned by your child working in your business are earned income, not unearned income, so the kiddie tax generally does not apply to the wages themselves. However, if you direct business income into accounts that generate investment returns for your child, the kiddie tax rules may become relevant. Consult a tax professional for guidance on your specific situation.

A Detailed Numerical Example: How the Tax Math May Work

The following example is simplified for illustration purposes. The actual outcome will depend on each taxpayer's specific facts, filing status, other income, deductions, and applicable limitations. This example does not constitute tax advice.

Facts: Maria operates a Schedule C marketing consulting business in Las Vegas, Nevada. She is a sole proprietor. Her 15-year-old daughter, Sofia, helps with social media content creation, client photo editing, and organizing digital files — tasks that are genuine and documentable. Maria pays Sofia $15,000 in wages during 2026.

Step 1 — Business deduction: Maria deducts $15,000 as a wages expense on her Schedule C. Assuming Maria is in a combined federal income tax and self-employment tax bracket of approximately 30%, this deduction may reduce her federal tax by roughly $4,500 (simplified; $15,000 × 30% = $4,500).

Step 2 — Payroll tax treatment: Because Maria is a sole proprietor and Sofia is under 18, Sofia's wages are generally exempt from FICA (Social Security and Medicare) taxes and FUTA. Maria still must issue Sofia a W-2, maintain payroll records, and comply with applicable payroll withholding rules.

Step 3 — Sofia's tax liability: If the 2026 standard deduction for a single filer is $15,700 (hypothetical inflation-adjusted example — the actual 2026 figure will be announced by the IRS), and Sofia has no other income, her $15,000 in wages falls entirely below the standard deduction threshold. Sofia may owe $0 in federal income tax on those wages.

Combined simplified result: The family may collectively reduce federal taxes by approximately $4,500 — the amount deducted at Maria's marginal rate — while Sofia potentially owes no federal income tax on the same wages. This example is simplified and does not account for state taxes, other deductions, or Maria's full tax situation. A licensed tax professional should evaluate your specific facts before you implement any strategy.

How Does This Apply to Nevada and Las Vegas Business Owners?

Nevada does not impose a state personal income tax. That means wages earned by your child while working in a Nevada-based business are not subject to Nevada state income tax — there is no state-level savings to calculate on top of the federal benefit, because there is no state income tax to begin with.

However, Nevada businesses are subject to other obligations that business owners should be aware of:

• Modified Business Tax (MBT): Nevada imposes a Modified Business Tax on wages paid above certain quarterly thresholds. For general businesses, the MBT applies at a rate of 1.378% on wages exceeding $50,000 per quarter (threshold current as of this writing; confirm the current rate with a Nevada tax professional). Wages paid to your child count toward your payroll for MBT purposes.
• Nevada Commerce Tax: Businesses with Nevada gross revenue exceeding $4 million per year may be subject to the Commerce Tax. This is separate from payroll obligations but relevant context for growing businesses.
• Federal payroll obligations: All federal payroll rules — W-2 issuance, withholding, payroll deposits, Form 941 or 944 filings — still apply regardless of Nevada's lack of a state income tax.

If you run a business in the Las Vegas metropolitan area, you can learn more about our services at Elite Tax Consulting and how we help local business owners navigate both federal and Nevada-specific tax obligations.

What Records and Documents Should You Keep?

At a minimum, maintain the following records:

• Written job description: A clear, written description of the tasks your child performs, signed and dated.
• Time records: Logs showing dates worked, hours worked, and tasks completed. A simple spreadsheet updated consistently is sufficient.
• Pay stubs or payment records: Each payment should be documented with the date, amount, and method of payment.
• Separate bank account: Paying your child's wages by check or direct deposit into a bank account in the child's name provides a clear paper trail and supports the legitimacy of the arrangement.
• W-2 form: You must issue your child a W-2 by January 31 of the following year, just as you would for any employee. File the corresponding Form W-3 with the Social Security Administration.
• Work product samples: Retain examples of actual work your child performed — social media posts, photographs, spreadsheets, correspondence — as supporting evidence that real work was done.
• Payroll tax filings: Keep copies of Form 941, Form 944, and any state payroll filings, even if your child's wages are exempt from certain taxes. The exemption must be documented, not assumed.

What Mistakes Most Often Cause IRS Problems?

• Paying unreasonably high wages: If your 10-year-old is paid $40,000 per year for part-time work, the IRS will likely disallow the excess. Pay a market-rate wage for the actual hours worked and actual tasks performed.
• No actual work performed: Paying your child on paper without genuine work is not a deduction — it is a potential fraud issue.
• No payroll records or W-2: Failing to issue a W-2 or maintain records is one of the fastest ways to lose a deduction.
• Paying cash with no documentation: Cash payments without any supporting records are very difficult to defend in an audit.
• Mixing personal and business accounts: Commingling funds makes it harder to demonstrate that wages were genuine business payments.
• Assuming all entity structures are equal: The FICA exemption is specific to sole proprietors and qualifying partnerships. Do not assume the exemption applies if you operate through an S corporation or other corporate structure.
• Failing to comply with child labor laws: Federal child labor laws and state laws restrict hours and types of work for minors. Non-compliance is a separate legal risk from any tax issue.

What Should Business Owners Do Next?

If you believe this strategy may be appropriate for your business, here are the practical steps to take before implementing it:

1. Consult a qualified tax professional who can evaluate your specific entity structure, your child's age, the nature of the work, and the appropriate wage level before you begin. You can schedule a consultation with Alfonso Luna Bentin here.
2. Review your business entity structure. If you operate through an S corporation or multi-member LLC, discuss with your tax advisor whether restructuring makes sense for your situation — keeping in mind that entity choice involves many factors beyond this one tax strategy.
3. Create a written employment arrangement that identifies the position, the duties, the pay rate, and the expected hours.
4. Set up proper payroll — including payroll software or a payroll service, payroll tax accounts with the IRS, and state payroll registrations if applicable.
5. Open a separate bank account in your child's name and pay wages directly into it.
6. Maintain consistent time and task records throughout the year.
7. Verify compliance with federal and Nevada labor laws before allowing your child to begin working.

Frequently Asked Questions About Hiring Your Children in Your Business