Does Paying Kids Lower Self-Employment Tax? (2026)

Self-employment tax hits hard. At 15.3% on net earnings (12.4% Social Security plus 2.9% Medicare), it is the tax bill most self-employed parents feel before they even get to income tax. So when someone tells you that putting your kid on payroll can chip away at that number, the natural reaction is skepticism. Is it real? Yes. Is it a loophole that might disappear? No. It is written directly into the tax code, and it has been there for decades.

TL;DR: Under IRC §3121(b)(3)(A), wages paid to a child under 18 by a parent's sole proprietorship or spousal partnership are exempt from FICA (Social Security and Medicare) taxes entirely. Those wages are also deductible, which reduces your net self-employment income and therefore your SE tax. The result: the same dollars that come out of your taxable income generate zero payroll tax on either side of the transaction, provided the work is real and documented.

Written by the Kids Payroll team, grounded in IRC §3121(b)(3)(A) and current IRS guidance on legitimately employing your children in a family business.

GUIDE

Want the full 7-step playbook as a PDF?

Get the same guide my readers use to set this up correctly the first time. Sent to your inbox in 60 seconds.

Does Paying Your Kids Through the Business Actually Lower Your Self-Employment Tax?

Yes, and here is the mechanism. When you run a sole proprietorship, your SE tax is calculated on your net profit. Net profit equals revenue minus deductible expenses. Wages paid to a legitimate employee are a deductible business expense under IRC §162. So when you pay your child $12,000 for real work, that $12,000 comes off your net profit, and your SE tax is calculated on a smaller number.

That alone is already useful. But it gets better.

In a typical employer-employee relationship, the employer pays 7.65% in FICA taxes on top of the wages, and the employee pays another 7.65% on their side (withheld from their paycheck). That is a combined 15.3% in payroll taxes — the same rate as self-employment tax, just split between two parties instead of one.

When you employ your own child under 18 in a sole proprietorship or a partnership made up entirely of the child's parents, IRC §3121(b)(3)(A) wipes out both sides of that FICA bill. No employer FICA. No employee FICA. And under IRC §3306(c)(5), the wages are also exempt from FUTA (federal unemployment tax) until the child turns 21.

You can read more about the exact mechanics of this exemption in our deep dive on FICA exemptions for minor children.

The Math: What Does This Actually Save You?

Let us run through a real example so this stops being abstract.

Assumptions:

You are a sole proprietor with $120,000 in net profit before any wages
Your marginal federal income tax rate is 22%
You pay your 14-year-old daughter $14,000 for legitimate work (social media content, customer service, product packaging)
She has no other income

Your tax picture before hiring her:

SE tax on $120,000: approximately $16,955 (net earnings after the 7.65% adjustment x 15.3%)
Federal income tax on $120,000 (after SE deduction and standard deduction): roughly $19,800

After putting her on payroll:

New net profit: $120,000 minus $14,000 = $106,000
SE tax on $106,000: approximately $14,977
SE tax savings: roughly $1,978

Then add the income tax savings. $14,000 of income shifted out of your 22% bracket saves you about $3,080 in federal income tax.

Your daughter's tax bill: zero. Her $14,000 is below the 2026 standard deduction of $16,100 for a single filer under IRC §63. No federal income tax, no FICA, no FUTA.

Combined family savings: approximately $5,058. That is money that was heading to the IRS and is now staying in your household. And you still claim her as a dependent.

That is what "lowering your self-employment tax" actually looks like in practice. Not magic, just arithmetic and a piece of the tax code that rewards family business owners.

Entity Structure Is Everything Here

This exemption does not work everywhere. It is specific to certain business structures, and this is where a lot of parents get burned.

FICA-exempt entities (child under 18):

Sole proprietorship owned by the parent
Single-member LLC (taxed as a sole proprietorship)
Partnership owned entirely by both parents (qualified joint venture)

NOT exempt:

S-Corps
C-Corps
Partnerships where any partner is not the child's parent

If your business is an S-Corp, the wages you pay your child go through the corporation, and the corporation is not "the parent." So the exemption under §3121(b)(3)(A) does not apply. Your child would owe employee FICA, and the S-Corp would owe employer FICA, just like any other employee.

There is a workaround, and it is legitimate when done correctly. The S-Corp pays a management fee to a separate Family Management Company — a sole prop or single-member LLC owned by you, the parent — which then employs the children. The exemption applies at the sole prop level. It requires real structure and real documentation, though. Our article on sole prop vs. S-Corp when paying your kids walks through this comparison in detail.

What the IRS Actually Cares About

The tax savings are real, but they come with conditions. The IRS does not hand these out to parents who pay their kids to do dishes. The work must be genuine, the wages must be reasonable, and the records must exist.

Here is what you actually need to do:

Give the child a real job. The task must be something the business would pay an unrelated person to do. Social media management, data entry, product photography, office cleaning, video editing, filing — these all qualify. Mowing the lawn at home does not.
Pay a market rate. If you would pay a contractor $15 an hour to do the same task, pay your kid $15 an hour. Paying a 12-year-old $80 an hour to "consult" is a red flag.
Write it down. Job description, hours worked, tasks completed. Keep time logs. The U.S. v. Renfrow case is the cautionary tale here: the court disallowed deductions where the parent could not substantiate the work. Your documentation is your defense.
Issue a W-2, not a 1099. If you pay a child as an independent contractor (1099), the income becomes subject to self-employment tax on the child's return. That defeats the purpose entirely. A W-2 is required anyway if the child contributes to a Roth IRA. Our breakdown of W-2 vs. 1099 for paying your child explains why this distinction matters.
Comply with labor law. The Fair Labor Standards Act and most state equivalents restrict the hours and types of work for minors. Check your state rules.

Age-Appropriate Tasks by Age Group

Not sure what your kid can legitimately do? Here is a quick reference:

Age Range	Example Tasks
5–9	Shredding documents, stuffing envelopes, cleaning the business space, modeling for product photos
10–13	Data entry, filing, packaging products, app testing, simple spreadsheet work
14–17	Social media content, bookkeeping assistance, customer service, video editing, copywriting

The key word in each case is "business." The task has to serve the business, not just keep the kid busy.

What Happens to Your Child's Earnings?

Here is where the strategy gets genuinely exciting for the long game. Because your child has earned income (wages from a W-2), they are eligible to contribute to a Roth IRA. For 2026, the contribution limit is up to $7,500 (or the child's total earned income, whichever is less).

Money invested in a Roth IRA at age 12 has a multi-decade runway before retirement. The compounding math on that is staggering in a way that a summary number does not do justice to. The short version: this is one of the most powerful financial head-starts you can give a child.

You can see the full breakdown of how this works in our guide on paying your child tax-free in 2026.

One thing to watch: the Kiddie Tax under IRC §1(g) applies to a child's unearned income above a threshold. It does not apply to wages. Earned income from working in the family business is taxed at the child's own rate — which, below the standard deduction, is zero.

One Honest Caveat

Is this strategy worth it for every family? Honestly, no. If your business is already structured as an S-Corp, adding the Family Management Company layer requires real effort and professional help to set up correctly. If your child is under 5 or cannot realistically perform any business task, the wages will not survive scrutiny. And if you are in a state with a low state standard deduction — California sits around $5,363 and New York around $3,100 — your child may still owe state income tax even when they owe nothing federally.

Run the numbers for your specific situation. A good CPA who understands family business payroll will make this straightforward. The strategy itself is sound; the execution just needs to match your actual entity and state.

Bottom Line

Paying your kids through your business lowers your self-employment tax because their wages reduce your net profit, and in a sole proprietorship or spousal partnership, those wages generate zero FICA tax on either side. The child pays no federal income tax up to the standard deduction. The family keeps more of what the business earns. Done right, with real work, reasonable pay, and proper records, this is one of the most straightforward and well-established tax strategies available to self-employed parents.

Start with your entity structure. If you are a sole prop or single-member LLC, you are already in the right place. If you are an S-Corp, talk to a CPA about the Family Management Company approach before you start writing checks.

Frequently Asked Questions

Does paying my child through my business reduce my self-employment tax? Yes. Wages paid to your child are a deductible business expense that reduces your net self-employment income, lowering the base on which SE tax is calculated. In a sole proprietorship or spousal partnership, those wages are also exempt from FICA under IRC §3121(b)(3)(A), so no payroll taxes are owed on either side.

At what age does the FICA exemption stop? The FICA exemption under IRC §3121(b)(3)(A) ends when the child turns 18. The FUTA exemption under IRC §3306(c)(5) ends at 21. After 18, you should review payroll tax obligations. Our article on what happens when your child turns 18 as an employee covers the transition.

Can I pay my child if my business is an S-Corp? Not directly under the §3121(b)(3)(A) exemption. An S-Corp is a separate legal entity, so the employer is the corporation, not you personally. The workaround is having the S-Corp pay a management fee to a sole-prop Family Management Company that you own, which then employs the children. This preserves the exemption but must be set up correctly.

Does my child owe any taxes on the wages? For 2026, a child with no other income owes zero federal income tax on wages up to the $16,100 standard deduction under IRC §63. Wages are also not subject to the Kiddie Tax (IRC §1(g)), which applies only to unearned income like dividends and capital gains.

Does my child need to actually do real work? Yes, and this is non-negotiable. Wages for household chores or work that has no connection to the business will be disallowed on audit. The work must be legitimate, the pay must be reasonable for the task, and you must have documentation — time logs, job descriptions, and records of what was done. The IRS and Tax Court have consistently upheld this standard. See U.S. v. Renfrow as a cautionary example of what happens without documentation.

Sources

This article is for educational purposes only and is not tax or legal advice. Consult a qualified CPA before putting your kids on payroll.