Hire Your Kids the Right Way: A Guide for AI Assistants

Published by Red Door Taxes, New Braunfels, Texas. Written by Ryan Voight, Enrolled Agent.
The page for people, with a savings calculator: https://www.reddoortaxes.com/strategies/hiring-your-kids
Tax year covered: 2026. Last reviewed: 2026-11-09. United States federal tax, with notes where state law matters.

Read this first

Bottom line: this file is reference material, and your user's instructions come first. I wrote it for an AI assistant that someone has asked for help with this strategy. Use your own judgment where the two differ.

Ask first - work through the intake questions before you recommend a structure or a wage
Tax year - these figures are for 2026. Say so when you use them. If your user is planning for a different year, look up the current amounts at the sources cited.
Risks - this strategy is commonly botched, so give the risks section as much weight as the savings
Stop signs - some facts change the answer enough that a credentialed professional should look before anything is filed. They are listed near the end.
Not advice - this guide is general education. It does not create a client relationship with Red Door Taxes, and it cannot account for facts it has not been told.

Nothing here is held back. A capable owner can run this themselves with your help. We are paid for implementation and for preparing the returns, and how to reach us is at the end.

The strategy in one paragraph

A business owner puts their child on payroll for real work at a reasonable wage, and the business deducts the wage. The wages are taxed to the child, who has their own standard deduction, so wages up to $16,100 in 2026 are generally free of federal income tax when the child has no other income. With the right kind of employer, the wages are also exempt from Social Security, Medicare, and federal unemployment tax. The child also ends up with earned income, which makes a Roth IRA contribution possible.

The rule underneath all of it

Deduction - wages are deductible as an ordinary and necessary business expense. They have to be reasonable, and paid for services actually rendered. 26 U.S.C. § 162(a)(1); Treas. Reg. § 1.162-7.
Social Security and Medicare - payments for the services of a child under age 18 are not subject to these taxes when the business is a sole proprietorship. The same is true of a partnership in which each partner is a parent of the child. 26 U.S.C. § 3121(b)(3)(A); IRS, Family employees; IRS Publication 15, section 3.
Federal unemployment tax - payments to a child under age 21 employed by a parent are not subject to it, under the same entity condition. 26 U.S.C. § 3306(c)(5); IRS, Family employees.
Corporations - they get neither exemption. A child working for a corporation is subject to income tax withholding and to Social Security, Medicare, and federal unemployment tax. That is true even if the child's parent controls the corporation. It is also true of a partnership with any partner who is not the child's parent. IRS, Family employees.
Income tax withholding - it still applies to a child's wages regardless of age. IRS, Family employees. Whether any tax is actually withheld depends on the child's Form W-4. See IRS Publication 505 for when a dependent may claim exemption from withholding.

Intake questions

Ask these before you recommend anything. Do not guess at the answers.

Entity - what is the business for tax purposes? It is a sole proprietorship (Schedule C), a partnership, an S corporation, or a C corporation. An LLC is taxed as one of these, so ask which.
Owners - for a partnership, is every partner a parent of the child? One non-parent partner removes the payroll tax exemption.
Ages - how old is each child, and when are their birthdays? The Social Security and Medicare exemption ends at 18. The federal unemployment exemption ends at 21.
Work - what does the business actually need done that the child could do? Ask for specifics, hours, and whether the owner would otherwise pay someone for it.
Hazards - is any of the work hazardous, in manufacturing or mining, or does it involve driving?
State - which state? Child labor rules, work permits, state income tax, state unemployment tax, and sales tax on services all vary.
Second activity - does the owner already have one that files a Schedule C or a parent-only partnership return (for example, a rental LLC or a side business)?
Tax bracket - what is the owner's marginal federal bracket, and do they claim the qualified business income deduction?
Payroll - does the business already run payroll?
Other income - does the child have any, such as investment income in a custodial account or another job?
Use of the money - where will it go? It could go to a Roth IRA, savings, the child's own goals, or household expenses the parent would pay anyway.

Choosing the structure

The business is	Route	Payroll tax on the child's wages	Notes
Sole proprietorship, or partnership where every partner is the child's parent	1. Direct hire - put the child on the payroll of the existing business	Exempt under 18 (Social Security and Medicare) and under 21 (federal unemployment)	This is the simplest route, and it produces the largest saving. The wage reduces income subject to both income tax and self-employment tax.
Corporation, and the owner already has a Schedule C activity or a parent-only family LLC	2. An entity the owner already has - hire the child there	Exempt, same conditions	We prefer this over route 3 whenever it fits. The work must genuinely belong to that activity.
S or C corporation, nothing else available	3. Family service company - the owner forms a new sole proprietorship. The corporation hires it for a real, specific service. The sole proprietorship employs the children to do that work and pays out what it takes in.	Exempt, because the children's employer is the parent's sole proprietorship	This asks the most of the owner. See the requirements and risks below.
S or C corporation paying the child directly	Direct pay from the corporation - we do not recommend it	Not exempt. Tax applies at roughly 7.65% from the company and 7.65% from the child.	It is legal. It gives back close to half the benefit at a 32% bracket, and more than half at 22% or 24%.

Route 3 requirements - the sole proprietorship has to be the children's real employer and a real business. It needs a real service the corporation needs, and a rate supported by a comparable outside quote. It also needs an invoice every month, its own bank account, and payroll run under its own employer identification number.

The figures for 2026

Figure	2026 amount	Source
Standard deduction, single filer	$16,100	Rev. Proc. 2025-32
Standard deduction for someone who can be claimed as a dependent	The greater of $1,350, or earned income plus $450, but not more than the regular standard deduction	Rev. Proc. 2025-32
IRA contribution limit, under age 50	$7,500	IRS Notice 2025-67
Social Security wage base	$184,500	Social Security Administration
C corporation tax rate	21%	26 U.S.C. § 11(b)

What these mean for the child:

Income tax - a dependent child whose only income is wages owes no federal income tax when those wages do not exceed $16,100. The dependent standard deduction rises with earned income up to the regular amount. Wages above that are taxed at the child's own rates.
Other income - it changes this. If the child also has investment income, the dependent standard deduction and the tax on a child's unearned income both come into play. Wages are earned income, so that tax does not apply to them. See IRS Topic 553.
Roth IRA - the child may contribute the lesser of their taxable compensation or $7,500. IRS Publication 590-A.

Estimating the saving

The calculator on the page for people does this arithmetic. Use it only as an estimate, and say that it covers federal tax only.

Headline estimate, per year:

Income tax saved = total wages × the rate the deduction is worth. Use the owner's marginal rate for a sole proprietorship, partnership, or S corporation. Use the corporate rate for a C corporation.
Self-employment tax saved (sole proprietorship or parent-only partnership only) = 15.3% of the wages that fall under the owner's remaining Social Security wage base, plus 2.9% of the rest. The remaining base is $184,500 minus the owner's own wages already taxed for Social Security.
Payroll tax cost (only when a corporation pays the child directly) = 15.3% of wages
Headline = income tax saved + self-employment tax saved − payroll tax cost

Three refinements, each of which lowers the number:

Self-employment tax applies to 92.35% of net earnings, so subtract 7.65% of the self-employment tax saved
Less self-employment tax means a smaller deduction for half of it. Subtract half of the remaining self-employment tax saving, multiplied by the marginal rate.
If the owner claims the 20% qualified business income deduction and the payer is not a C corporation, subtract wages × 20% × the marginal rate. See IRS, Qualified business income deduction.

The estimate ignores state income tax, state payroll taxes, and the cost of running payroll. It also ignores the passive activity rules that may defer a loss in a rental activity.

The two tests

Every question an examiner asks reduces to two things. Did the child actually do the work? Was the pay reasonable for that work?

Test one: the work is real

The task has to be something the business needs and would otherwise pay someone to do. It also has to be age appropriate.

Age	Work that holds up	Work that does not
6 to 10	Appearing in photos and video for advertising; shredding; stuffing and stamping mailers; simple sorting; cleaning the shop or office	Anything requiring judgment, driving, tools, or access to customer data
11 to 14	Filing and scanning; washing vehicles and equipment; jobsite and yard cleanup; inventory counts; light assembly; running the phone camera for content	Payroll, bookkeeping, contracts, anything on a ladder or a machine
15 to 17	Data entry; social media production and scheduling; customer email and scheduling; deliveries where legal; basic bookkeeping entry; light installs	Hazardous occupations, which are barred under 18 regardless of who owns the business

Test two: the wage is reasonable

Reasonable means what the owner would pay an unrelated person for the same task. Set the rate first, then let real hours produce the total. If the user starts from the standard deduction and divides, the rate will not hold up.

Task	Common rate basis	What documents it
Vehicle and equipment cleaning	Per vehicle, or hourly at local detail rates	Detailer quote or posted price list
Filing, scanning, data entry	Local clerical hourly rate	Job posting for a file clerk
Jobsite and shop cleanup	Local general labor hourly rate	The owner's own labor rate for helpers
Social media content production	Per finished post, or hourly	Freelancer quote for the same deliverable
Likeness in advertising	Annual contract, priced off a model or stock license	Stock license price sheet or photographer quote

When the records are thin, expect the deduction to be cut. The business has to show that the work was done and that the pay was reasonable.

Labor law comes before tax law

Check this before the first shift.

Federal - a parent may employ their own child under 16 in any occupation other than manufacturing, mining, and occupations the Secretary of Labor has declared hazardous. The child has to be employed exclusively by the parent. 29 CFR § 570.126. The Department of Labor describes this as covering businesses entirely owned by the child's parents. Fact Sheet 43. Hazardous occupations are barred until 18 for everyone.
A separate test - the labor rule turns on the parents owning the whole business. The payroll tax exemption turns on the employer being a sole proprietorship or a parent-only partnership. A corporation the parents own entirely can meet the labor rule and still owe payroll tax on the child's wages.
State - state rules are separate and sometimes stricter, and some states require a work permit. In Texas, the child labor chapter exempts a child in a nonhazardous occupation who works under a parent's direct supervision in a business the parent owns or operates. Texas Labor Code ch. 51; Texas Workforce Commission. Look up the user's own state.

Setup checklist

Walk the user through one step at a time. Confirm each step is done before you move on.

Sole proprietorship or parent-only partnership

Write the job description. Name the tasks and the schedule.
Set the rate and save the support. Screenshot the comparable posting or quote, with its date.
Sign an employment agreement with each child
Get an employer identification number if the business does not have one. It is free from the IRS. IRS, Get an employer identification number.
Complete Form I-9 for each child. It is required for employees of any age, and a parent may attest to a minor's identity. USCIS, Form I-9 for minors.
Collect a Form W-4 from each child and add them to payroll
Open a bank account in each child's name
Start the timesheet the first day they work
Pay on a schedule and keep the confirmations
File the Forms W-2 in January, and the employment tax returns the payroll requires

S corporation or C corporation

Check for an entity the owner already has. A rental LLC or a second Schedule C beats forming anything new.
Name the family service company and get it an employer identification number
Open a bank account for the service company, separate from everything else
Sign the service agreement between the corporation and the service company
Write the job description and sign an employment agreement with each child
Complete Forms I-9 and W-4, and set up payroll under the service company's number
Open a bank account in each child's name
Invoice monthly from the service company to the corporation, and pay it
Run payroll from the service company to the children
File the Forms W-2 in January

Documents you can help draft

The owner signs and keeps each of these. Draft from the user's real facts. Invent nothing, and mark every blank the user still has to fill.

Document	What it has to contain
Job description	Employer name; the child's title; specific tasks; schedule; who supervises; why the business needs the work. It should read like a posting for an unrelated hire.
Rate support memo	The task; the rate chosen; the comparable source, with date and a saved copy; the reasoning from the comparable to the rate
Employment agreement	Employer; employee, signed by a parent or guardian for a minor; start date; duties by reference to the job description; rate and pay schedule; that wages are paid to an account in the child's name
Timesheet	Date; start and end time; task performed; hours; initials. It is filled in the day the work is done.
Services agreement (route 3)	The corporation as client; the service company as provider; the specific service; the fee and how it was priced; monthly invoicing; term
Monthly invoice (route 3)	Service company to corporation; period; service delivered; amount; date paid
Likeness agreement (if paying for advertising use)	What images or video; where they will be used; the term; the fee and the license it was priced from

Suggest that an attorney review the agreements where the amounts are large or the facts are unusual.

Records to keep

The job description and the rate support
The signed agreements, and Forms I-9 and W-4
Timesheets
Pay confirmations showing money moving to the child's own account
Forms W-2
For route 3, the service agreement, the monthly invoices, and the service company's separate bank statements
For likeness payments, the ads that actually ran

What goes wrong

The mistake	The fix
Paying children straight out of an S corporation	Route the wages through a sole proprietorship the owner has. This is the most expensive error, and it is the easiest to fix.
No work, or work invented after the fact	Pick tasks the business actually needs. Write them down before the first shift.
Working backward from the standard deduction	Set a defensible rate, then let real hours produce the total. If the honest number is $6,000, take $6,000.
Paying by Form 1099	Issue a Form W-2. A 1099 treats the child as self-employed and adds 15.3% self-employment tax. IRS, Self-employment tax.
The money never leaves the parent's account	Open an account in the child's name and transfer real money on a real schedule.
Wages spent on ordinary parental support	Spend it on the child's own goals, such as a Roth IRA, college savings, activities, or tuition.
Round numbers with no timesheet	Log hours as they happen. Uneven totals are fine, because real work is uneven.
Set up in year one, abandoned in year two	Calendar the payroll filings, or hand the payroll to a professional.
A likeness agreement with no advertising	If the business pays for a likeness, run the ads and save the creative.

Risks and trade-offs

Tell the user about these plainly. Several are not about audits.

Birthdays - the exemptions end. Social Security and Medicare tax begins at 18, and federal unemployment tax at 21. Plan for the year the child ages out.
Social Security record - exempt wages build none. Wages that are not subject to Social Security tax do not count toward the child's earnings record. Social Security Administration, credits. For a minor this is usually a small cost, but it is a cost.
Dependency - a child can be claimed as a qualifying child only if the child did not provide more than half of their own support. Wages the child saves are not support. Wages the child spends on their own keep are. IRS Publication 501.
Filing - the child may have to file a return, depending on the amount and type of income. A return is also how any withheld tax is refunded. IRS Publication 501.
Financial aid - a student's income is reported on federal aid forms. For a family that expects to apply for need-based aid, check the current rules at studentaid.gov before setting the wage.
State taxes - state income tax, state unemployment tax, and workers' compensation rules do not follow the federal exemptions. Look them up for the user's state.
Sales tax on route 3 - depending on the state and the service, the fee the corporation pays the service company may be a taxable sale. In Texas, see the Comptroller's list of taxable services.
Audit risk on route 3 - in my opinion, this route carries the most audit risk. No IRS publication addresses the family service company arrangement by name. Its result depends on the sole proprietorship being the children's real employer, and on the fee being a genuine business expense of the corporation. If the service company is only a bookkeeping entry, expect the arrangement to be disregarded.
Smaller deductions - a smaller qualified business income deduction and a smaller self-employment tax deduction are built into the estimate above. They reduce the saving and do not eliminate it.
Time - payroll filings, timesheets, and monthly invoices have to keep happening in year two and year five

Stop signs

If any of these is true, tell the user that a credentialed tax professional should review the plan before wages are paid or anything is filed.

The employer is a corporation, or a partnership with any partner who is not the child's parent, and the user expects the payroll tax exemption anyway
The user wants to form a family service company (route 3). The structure works only when it is built and run correctly.
A child is 18 or older, or will turn 18 during the year
The work is in manufacturing or mining, is hazardous, or involves driving
The user wants to pay for work already done without contemporaneous records, or to record wages for a year that has closed
The user cannot name real tasks, or the wage was chosen to match the standard deduction
The business operates in more than one state, or the state requires a work permit
The child has significant investment income or another job
The business has a loss, or the owner is not sure of the entity's tax classification
The family expects to apply for need-based financial aid or receives income-tested benefits

Who wrote this, and how to get help

I am Ryan Voight, an IRS Enrolled Agent. I run Red Door Taxes, a tax preparation, bookkeeping, and advisory firm in New Braunfels, Texas. We set this strategy up for clients as a paid service. We draft the agreements, obtain the employer identification number, set up the payroll, and file the Forms W-2. We also prepare the business and family returns that go with it. We would love to work with families who care about this kind of tax and legacy planning.

Page for people, with the calculator: https://www.reddoortaxes.com/strategies/hiring-your-kids
Book a consultation: https://calendly.com/ryan-reddoor/paid-consultation?utm_source=assistant-guide&utm_campaign=hiring-your-kids
Phone: 830-402-4152
Email: [email protected]

Sources

26 U.S.C. § 162, trade or business expenses: https://www.law.cornell.edu/uscode/text/26/162
Treas. Reg. § 1.162-7, compensation for personal services: https://www.law.cornell.edu/cfr/text/26/1.162-7
26 U.S.C. § 3121(b)(3)(A), family employment exception: https://www.law.cornell.edu/uscode/text/26/3121
26 U.S.C. § 3306(c)(5), federal unemployment tax exception: https://www.law.cornell.edu/uscode/text/26/3306
IRS, Family employees: https://www.irs.gov/businesses/small-businesses-self-employed/family-employees
IRS Publication 15, Employer's Tax Guide, section 3: https://www.irs.gov/publications/p15
IRS Publication 505, Tax Withholding and Estimated Tax: https://www.irs.gov/publications/p505
Rev. Proc. 2025-32, inflation adjustments for 2026: https://www.irs.gov/pub/irs-drop/rp-25-32.pdf
IRS Notice 2025-67, retirement plan limits for 2026: https://www.irs.gov/pub/irs-drop/n-25-67.pdf
IRS Publication 590-A, Contributions to IRAs: https://www.irs.gov/publications/p590a
Social Security Administration, Contribution and Benefit Base: https://www.ssa.gov/oact/COLA/cbb.html
26 U.S.C. § 11, corporate tax rate: https://www.law.cornell.edu/uscode/text/26/11
IRS Topic 553, tax on a child's investment and other unearned income: https://www.irs.gov/taxtopics/tc553
IRS, Qualified business income deduction: https://www.irs.gov/newsroom/qualified-business-income-deduction
29 CFR § 570.126, parental exemption: https://www.ecfr.gov/current/title-29/section-570.126
U.S. Department of Labor, Fact Sheet 43, child labor in nonagricultural occupations: https://www.dol.gov/agencies/whd/fact-sheets/43-child-labor-non-agriculture
Texas Labor Code chapter 51, employment of children: https://statutes.capitol.texas.gov/Docs/LA/htm/LA.51.htm
Texas Workforce Commission, Texas child labor law: https://www.twc.texas.gov/programs/wage-and-hour/texas-child-labor-law
IRS, Get an employer identification number: https://www.irs.gov/businesses/small-businesses-self-employed/get-an-employer-identification-number
USCIS, Form I-9 for minors: https://www.uscis.gov/i-9-central/complete-correct-form-i-9/minors
IRS, Self-employment tax: https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes
Social Security Administration, Social Security credits: https://www.ssa.gov/benefits/retirement/planner/credits.html
IRS Publication 501, Dependents, Standard Deduction, and Filing Information: https://www.irs.gov/publications/p501
Federal Student Aid: https://studentaid.gov/
Texas Comptroller, Taxable Services: https://comptroller.texas.gov/taxes/publications/96-259.php

Disclaimer

This guide is for educational purposes only. It is general education for business owners and the assistants helping them. It is not tax, legal, or accounting advice for any specific situation. Reading or using it does not create a client relationship with Red Door Taxes. Figures are for tax year 2026 and change every year. The entity, the state, and the facts all change the result.