Hiring your child can be a legitimate way to bring needed help into your business while creating valuable tax and savings opportunities for your family. But the strategy works only when the job, compensation, payroll, and records are handled like a real employment arrangement.
For 2026, business owners should pay particular attention to the child’s duties, the entity that employs the child, and the documentation supporting every paycheck. The rules can be favorable, but they are not automatic—and Virginia, Maryland, and District of Columbia requirements may add another layer.
What business owners need to know
The 2026 federal standard deduction for a single taxpayer is $16,100. A child with wages and no significant other income may therefore owe little or no federal income tax on wages up to that amount, while the business may deduct reasonable compensation paid for bona fide services.
Payroll-tax treatment depends heavily on the business structure. Under the IRS family-employee rules, wages paid to a child under age 18 by a parent’s sole proprietorship—or a partnership in which every partner is a parent of the child—generally are not subject to Social Security and Medicare taxes. Wages paid to a child under age 21 in those businesses generally are not subject to federal unemployment tax. Those exemptions do not apply when the employer is a corporation, including an S corporation, or a partnership with a non-parent partner.
Eligibility and savings depend on the family’s complete facts. The child’s other income, the parent’s tax bracket, qualified business income deduction, state rules, entity structure, and payroll costs all affect the result.
Seven steps for an audit-ready arrangement
1. Give the child a real job
Start with work the business genuinely needs and the child can perform. Examples may include scanning and organizing records, maintaining inventory lists, preparing mailings, editing basic website content, scheduling approved social posts, or assisting with administrative projects. Duties should be appropriate for the child’s age and comply with federal and state labor rules.
2. Write a job description
Document the position, expected duties, supervisor, work location, schedule, and required skills. A short written description helps show that the arrangement is based on business needs rather than a transfer of family funds.
3. Pay a reasonable market rate
Compensation must be reasonable for the work actually performed. Keep evidence such as comparable local wage data, prior vendor costs, or a written explanation of how the hourly rate was established. Paying an inflated amount merely to maximize a deduction can undermine the entire strategy.
4. Track time and completed work
Require contemporaneous time sheets showing dates, hours, and tasks. Retain work samples when practical. Approve the records on a regular schedule, just as you would for any other employee.
5. Use real payroll
Pay the child by payroll check or direct deposit into an account belonging to the child. Complete the required federal and state onboarding and payroll filings, including Forms W-4 and W-2 when applicable. Confirm that your payroll provider applies the correct family-employment rules for your entity type.
6. Consider a Roth IRA
Earned income can make the child eligible to contribute to an IRA. The 2026 IRA contribution limit is $7,500, or the child’s taxable compensation if lower. For a child currently paying little or no federal income tax, a Roth IRA may be worth considering because qualified future withdrawals can be tax-free. Contribution eligibility and account ownership rules should be reviewed before funding.
7. Model the full tax effect
Do not evaluate the wage deduction in isolation. Wages reduce business income and may also reduce the qualified business income deduction. Corporations must account for payroll taxes, while sole proprietors and qualifying parent-only partnerships may receive more favorable payroll-tax treatment. A projection should compare the business deduction, payroll taxes, state taxes, retirement contribution options, and the child’s expected income tax.
Practical checklist
- Create an age-appropriate written job description.
- Document the market basis for the pay rate.
- Collect timely time sheets and retain work samples.
- Pay through payroll into the child’s account.
- File all required federal and state payroll forms.
- Verify FICA and FUTA treatment based on entity type and age.
- Evaluate Roth IRA funding and the Section 199A impact.
- Review child-labor restrictions before work begins.
When should you act?
Set up the employment arrangement before the child begins substantial work or receives compensation. Reconstructing duties, hours, and pay after year-end creates avoidable risk. If your child is already helping informally, this is a good time to determine whether a formal role makes business and tax sense for the remainder of 2026.
How Reckenen can help
Reckenen provides proactive tax, accounting, valuation, and advisory services to individuals and closely held businesses in Northern Virginia and Washington, DC, with selected services available nationwide. We can model the tax impact, review entity-specific payroll treatment, and help you build a practical documentation process before the first paycheck is issued.
This article is for general informational purposes only and is not tax, legal, or investment advice. Tax outcomes depend on individual facts and applicable federal, state, and local law. Consult a qualified professional before acting.