Own a Business? Stop Giving Your Kids Allowance! How 'Hiring Your Child' Saves You $5,000 in Taxes

Own a Business? Stop Giving Your Kids Allowance! How 'Hiring Your Child' Saves You $5,000 in Taxes (Legally)

You give your teenager $500 a month for clothes and movies. To you, that’s just a parenting expense. To the IRS, that is after-tax money that gave you zero deduction.

But if you own a small business (even a side hustle or freelance gig), you are missing out on one of the greatest tax shelters in America: Hiring Your Children.

By turning your child into a legitimate employee, you can shift income from your high tax bracket to their 0% tax bracket. Here is the 2026 guide to turning your family into a tax-saving machine.

How 'Hiring Your Child' Saves You $5,000 in Taxes

1. The Math: "Allowance" vs. "Salary"

Let's say you are in the 30% tax bracket (Federal + State).

• Giving Allowance: To give your child $15,000, you must first earn approx. $21,400 (paying $6,400 in taxes).
• Paying Salary: You pay your child $15,000 as wages. This is a Business Expense, so it reduces your taxable profit. You save that $6,400 in taxes immediately.

2. The "0% Tax" Bracket for Kids

Thanks to the Standard Deduction (projected to be over $15,000 in 2026 due to inflation adjustments), your child can earn up to this amount and pay $0 in Federal Income Tax.

You get the tax deduction, and they pay no tax on the income. It is a perfect "Tax Arbitrage."

3. The "No FICA Tax" Loophole

It gets better. If your business is a Sole Proprietorship or a Partnership (owned solely by parents) and your child is under 18:

• They are exempt from Social Security tax (6.2%).
• They are exempt from Medicare tax (1.45%).
• They are usually exempt from FUTA (Unemployment tax) until age 21.
• Result: The money moves from your pocket to their pocket 100% tax-free.

*Note: If you run an S-Corp or C-Corp, you still have to pay FICA taxes, but the Income Tax savings still apply.

4. The Roth IRA Multiplier

Since your child now has "Earned Income," they qualify to open a Custodial Roth IRA.

If you pay them up to the annual limit (approx. $7,000+ in 2026), they can put that entire amount into a Roth IRA. That money grows tax-free for 50 years. By the time they retire, that small salary could turn into $1 Million+ of tax-free wealth.

5. The Rules (Do Not Fake It)

The IRS is watching. To make this legal, you must follow strict rules:

1. Real Work: They must do actual work appropriate for their age (e.g., filing, shredding papers, cleaning the office, social media management, or modeling for ads).
2. Real Pay: The wage must be "reasonable." You cannot pay a 10-year-old $100/hour to clean trash; it must match what you would pay a stranger for the same task.
3. Real Records: Keep timesheets and pay them via check or direct deposit. Do not pay cash.
4. W-2 Form: You must file a W-2 for them at year-end.

Key Takeaways: Building Generational Wealth

Don't just give your kids money; give them a job. It teaches them work ethic, jumpstarts their retirement savings, and lowers your family's overall tax bill.

Consult your CPA today to set up payroll for your newest (and youngest) employee.

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Disclaimer: Labor laws vary by state regarding working age and hours. Ensure compliance with Department of Labor rules before hiring minors.