“$12,000 Child Work Deduction” is Tax Free Income To Your Child

Not everyone can pay their children and deduct those wages against their own earnings. Owners of sole proprietorships, single member LLCs and partnerships (where both partners are the employee’s parents) can benefit by hiring their child to work in their business. However, before you add your child to payroll, there are certain rules that you need to take into consideration.

First and foremost, it’s important to understand that if you hire your child to work in your business, you must pay them a reasonable wage for the work they perform. The work needs to be relevant to the business, and the pay should reflect the going rate for such work in the industry. The work performed should also be reasonably in-line with the capabilities of the child. A child who can not yet speak probably will not be answering the phones or doing secretarial work for your business, whereas a 15 year old could very reasonably do many tasks needed by the business to justify their wages. 

Assuming you pay your under-18-year-old-child a reasonable wage for the work they perform, your small business (sole proprietorship, SMLLC or both-parent-owned-partnership) can take a deduction for the wages you pay them.  This income is considered earned income, and as such, it is not subject to the Kiddie Tax. Because the child is under 18, the earnings are not subject to FICA (Social Security and Medicare Taxes). This also enables the business owner’s child employee to start saving for retirement by contributing up to $7,500 (for 2026) to a “custodial Roth IRA”. If the amount earned is less than the standard deduction ($16,100 for 2026), it will be income tax free to your child. Even without a filing requirement, it would be in your child’s best interest to file for recordkeeping purposes, especially if proof of income is needed to justify allowable IRA contributions. 

It’s important to note that if you hire your child to work in your business, you must treat them like any other employee. This means you need to keep accurate records of the hours they work, the tasks they perform, and the wages you pay them. You also need to comply with all applicable labor laws, such as minimum wage and overtime requirements.