The Hiring Your Kids Tax Strategy: How a Child Under 18 Earns $16,100 Tax-Free in 2026.

A consultant running a healthy Schedule C practice pays an agency $2,000 a month for social media work while her 15-year-old edits video and builds spreadsheets at the kitchen table for free. Moving that work onto the books is the hiring your kids tax strategy, and it is one of the cleanest income shifts in the code: the business deducts the wages at the parent's marginal rate, the child reports them at a rate of zero, and with the right entity nobody pays a dime of payroll tax. For 2026 the numbers are the most generous they have ever been, and the case law explaining how to do it right is decades old.

The strategy stands on three separate rules. The first is the standard deduction. For 2026, Rev. Proc. 2025-32 sets the single-filer standard deduction at $16,100, and a child you claim as a dependent gets to use it against wages: §63(c)(5) limits a dependent's standard deduction to the greater of $1,350 or earned income plus $450, capped at the regular $16,100. A child paid $16,100 in wages therefore deducts $16,100 and has taxable income of exactly zero.

The second rule is that the kiddie tax does not touch wages. IRC §1(g) pulls a child's net unearned income, interest, dividends, capital gains, up to the parents' rates, but earned income is taxed on the child's own single-filer brackets. So even above $16,100 the arbitrage continues: the next $12,400 of wages in 2026 is taxed to the child at 10% while the deduction still lands at the parent's 24%, 32%, or 35%.

The third rule is the payroll tax exemption, and it is entity-specific. IRC §3121(b)(3)(A) excludes from FICA "employment" the services of a child under 18 working for a parent, and §3306(c)(5) does the same for FUTA until age 21. The IRS confirms both on its family employees page, with one condition that trips people constantly: the exemption applies only when the employer is the parent, meaning a sole proprietorship, a single-member LLC taxed as one, or a partnership in which every partner is the child's parent. That is 15.3% of the wage that never gets paid by anyone.

Here is where most write-ups go quiet. If your business is an S corporation or C corporation, the employer is the corporation, not you, so §3121(b)(3)(A) never applies. The corporation withholds the employee half of FICA from the child's check and pays the employer half, 15.3% combined, plus FUTA. The strategy still works on the income tax side, a deduction at 32% against income taxed at 0% beats not paying the wage at all, but the payroll tax gives back roughly a third of the benefit.

The workaround you will see marketed is the family management company: the parent forms a separate sole proprietorship that employs the children, provides their services to the S corp under a written agreement, and bills the S corp for them. Done with substance, a real services agreement, invoices, the management company actually directing the work, it restores the FICA exemption because the children's employer is once again a parent. Done as a paper shuffle, it is exactly the kind of arrangement the IRS recharacterizes. Like the Augusta rule, this survives on documentation or not at all.

The Tax Court blessed the strategy itself long ago. In Eller v. Commissioner, 77 T.C. 934 (1981), the court confirmed that compensation paid to your own minor children is deductible under §162 when it is reasonable in amount, tied to services actually rendered, and actually paid, and then listed the failures it looks for: no employment tax filings or W-2s, a flat amount fixed at the start of the year regardless of work done, payments that do not line up with hours worked, missing records, and "work" that is really routine family chores. Denman v. Commissioner, 48 T.C. 439 (1967) is the other bookend, where deductions for sons hired as "office boys" were denied because the duties were light household tasks, and where the court announced that family payroll gets close scrutiny.

Passing that scrutiny is mostly bookkeeping discipline, not cleverness. The work has to be something a stranger would be paid to do: content editing, filing, cleaning the office, product photography, data entry. Then run it like real payroll.

• –Write a one-page job description and pay a defensible market rate for that work, not a number reverse-engineered from the standard deduction.
• –Keep contemporaneous timesheets and pay on a regular schedule into an account in the child's name, never cash back to the parent.
• –Issue a W-2 by January 31, collect a W-4 (the child can generally claim exemption from withholding if they expect no tax liability) and an I-9.
• –Stay inside child labor law. The FLSA exempts children employed by a business owned entirely by their parents from its minimum-age rules, outside mining, manufacturing, and hazardous occupations, but many states layer their own limits on hours and duties.

The wage does one more thing: it is compensation, which is the only key that opens an IRA. For 2026 a child can contribute the lesser of earned income or $7,500 to a custodial Roth IRA under the limits in IRS Notice 2025-67. A single $7,500 Roth contribution at age 15, growing at 7% for 50 years, is roughly $220,000 of tax-free money at 65, and that is one year of the strategy. It is the same compounding engine behind the Peter Thiel Roth IRA, started with a paper route instead of founders' shares. Between the wages, the deduction, and the Roth space, hiring a child who actually works is as close to free money as the code offers.