Putting Your Kids on Payroll: How to Move $16,100 Out of Your Tax Bracket — Legally

If you run a business and your kids are old enough to do real work, you’re sitting on one of the cleanest deductions in the code — and most owners never touch it because it sounds too good to be legal. It is legal. It just has rules, and you have to follow them.

Here’s the engine. In 2026 the standard deduction for a single person is $16,100. A child with no other income can earn up to that amount and owe zero federal income tax. Meanwhile, the wages you pay them come straight off your business income. So you’re moving money out of your bracket — where it’s taxed at your top rate — and into theirs, where it’s taxed at nothing.

Run the math

Say you’re a sole proprietor in the 32% bracket and you put your 15-year-old on payroll for $16,100 this year for legitimate work.

• Your business deducts the full $16,100.
• Your child owes $0 in federal income tax — the whole amount is covered by their standard deduction.
• At a 32% marginal rate, that deduction saves you about $5,152 in income tax.
• And because it lowers your Schedule C profit, you also shave self-employment tax off that same $16,100.

That’s real money that would otherwise have gone to the IRS, kept in the family. Do it for two kids and you’ve roughly doubled it.

The payroll-tax break has a catch — your entity decides it

This is the part people get wrong. Wages you pay your own child are exempt from Social Security and Medicare tax (“FICA”) only if the business is a sole proprietorship or a partnership owned entirely by the child’s parents, and the child is under 18. Federal unemployment tax (“FUTA”) drops off until they turn 21. A single-member LLC counts here too — for taxes it’s treated as a sole proprietorship.

The moment you’re an S-corp or a C-corp, that exemption is gone. The corporation has to withhold and pay full payroll taxes on your kid’s wages just like any other employee. So the same strategy that’s a home run for a sole prop is a weaker play once you’ve incorporated — something to weigh if you’re sitting on the S-corp fence.

Do it like a real job, or don’t do it at all

The IRS doesn’t have a problem with you hiring your kids. It has a problem with you pretending to. To survive a second look, treat it exactly like you’d treat any employee:

The work has to be real and age-appropriate — filing, shredding, packing orders, cleaning the shop, running the company’s social media, modeling for your website. The pay has to be reasonable for that work; you can’t hand a 9-year-old $16,100 for emptying a wastebasket. Put them on actual payroll with a W-2 — not a 1099 — keep a simple timesheet, and pay them into an account in their name. Paper trail or it didn’t happen.

One bonus most owners miss: once your child has earned income, they can fund a Roth IRA. A 15-year-old contributing a few thousand dollars a year, left alone for 50 years, turns into a number that doesn’t look real. That’s a separate conversation, but it’s the kind of move that makes this strategy do double duty.

This article is general information, not tax advice. The right wage, entity, and payroll setup depend on your specific business and your state's rules — let's look at your situation before you run payroll.