Can I Hire My Child As An Employee?

The most aggressive legal tax move available to self-employed parents is also one of the least known. You can pay your own kid out of your business, deduct the wages, and the kid pays no income tax on that income. In 2026, that ceiling is $15,750 per child. If you have two teenagers and you're earning enough to be in the 24% federal bracket, the family-level tax savings can be upwards of $7,500 a year.

As long as your kid's earned income stays under the limit, the federal income tax owed is zero, and your business gets the deduction.

4 tax tips when hiring your kids

1. Your kid must perform age-appropriate work for your business

Your child must be paid for actual work that's appropriate for the kid's age. That includes things like modeling for product photos at age 4, stuffing envelopes at age 10, or doing TikTok video editing at age 16. The work has to be real and the pay has to be reasonable for that work.

2. Make sure the pay is reasonable

What you choose to pay your child should align with what you’d pay someone else for the same work. You can’t pay them an inflated salary just to shift income to them for tax savings! Your best bet is to document how you came to that salary decision by looking at average compensation for similar work in your area.

3. Earnings shouldn't exceed the standard deduction

A child with earned income can generally earn up to the standard deduction amount before owing federal income tax.

4. You must be a sole proprietor, single-member LLC, or partnership where both partners are the kid's parents

If you're an S-Corp or C-Corp, payroll taxes (FICA: Social Security and Medicare) apply, which eats most of the tax benefit. The FICA exclusion for kids under 18 working for their parents, only applies to sole props and parent-only partnerships.

Let's see an example

Jordan runs a freelance web design business as a sole proprietor. She nets about $140,000, putting her in the 24% federal bracket plus 15.3% self-employment tax (until the SS cap). She pays her 16-year-old, Casey, $12,000 over the year to handle social media posting, basic web QA, and client invoicing.

The tax effect:

• Jordan's business deducts $12,000 in wages. Her self-employment income drops by $12,000.
• Casey owes zero federal income tax because $12,000 is below the $15,750 standard deduction.
• Casey owes zero FICA because she's under 18 and working for a parent's sole prop. (Saves another ~$1,800.)
• Jordan saves about $2,880 in federal income tax (24% of $12,000) and approximately $1,700 in self-employment tax savings.

Total family savings: about $4,580 on the federal side. Plus state savings depending on where they live.

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Should I hire my kid as an independent contractor or W-2 employee?

This is one of the biggest mistakes we've seen parents make. When you issue your child a 1099-NEC at the end of the year, they'll have to file their own tax return and owe 15.3% in self-employment taxes! The short answer is W-2 almost always makes sense.

While independent contractor status might seem simpler (no payroll setup, just send a 1099-NEC at year end), the IRS is skeptical when a child works in a parent's home or business and gets classified as a contractor.

The agency looks at the degree of control the employer has over the work, and a parent directing their own kid's tasks, hours, and location fits the definition of an employee, not a contractor. If you misclassify and get audited, you could owe back payroll taxes and penalties that wipe out the savings you were going for.

Setting up a simple payroll isn't as painful as it sounds. Tools like Gusto can get you set up quickly, and the paper trail of actual pay stubs and W-2s is exactly what protects you if the IRS ever asks questions.

Where should I deposit my kid's earnings?

Here's where you could make some tax-smart choices. Let's take a look:

A Roth IRA in the kid's name. They have earned income, so they're eligible. They can contribute up to the lesser of $7,000 (2026 limit) or their earned income. A 14-year-old who puts $7,000 into a Roth and lets it grow for 50 years at 7% has roughly $200,000 tax-free at retirement. That's the magic of compounding!

A 529 plan for college. The wages can be redirected into a 529 in the kid's name. State tax deductions on 529 contributions vary, but the federal growth is tax-free for qualified education expenses.

A bank account in their name for actual spending. Well, maybe it's time to let them budget and make some financial decisions on their own! They earned it, they get to spend it (with parental oversight of course)!

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When this strategy backfires

If your kid is a college applicant who needs financial aid, their assets (Roth IRA, 529, UTMA) can hurt FAFSA. Custodial Roths are weighted less. 529s under the parent's name are weighted least. Plan accordingly if college aid is on the table.

If you're an S-Corp, the math may not work out. The FICA savings are gone. You might still get some income tax savings, but the math is much weaker. Talk to a Keeper CPA about whether dropping to a sole prop or LLC for a year is worth it.

FAQs

Does my kid have to file a tax return?

If their earned income is under the standard deduction ($15,750 in 2026), no federal return is required. But filing a return anyway is a good practice. It establishes a paper trail and the kid gets a refund of any state tax withheld.

What about FICA for kids over 18?

At 18 and over, FICA applies. The income tax shield from the standard deduction still works, but the FICA savings disappear. The strategy still beats not hiring, but the gains are smaller.

Can I pay my kid through Venmo?

Yes, but document everything. Pay stubs, timesheets, and a memo on each transfer noting what the payment is for. The IRS doesn't care about the payment channel as long as the records are clean.

Do I need to file a W-2 for my kid?

Yes if your kid is your employee. Use Form W-2. File Schedule H or use your normal payroll if you have one. If you treat them as an independent contractor (which the IRS generally won't accept for a kid working in your home or office), you'd issue a 1099-NEC. Stick with W-2 status to stay clean.