Most parents who put their kids on payroll do the hard part right. They find legitimate work, set a reasonable wage, and actually run the payroll. Then tax season arrives and the questions start piling up. Does my child need to file a return? Where does the Roth IRA contribution go on the form? What if the wages are below the standard deduction?
Honestly, the filing side is simpler than most people expect. But the documentation side is where shortcuts come back to bite you.
TL;DR: A child with only W-2 wages does not have to file a federal tax return as long as those wages stay under the standard deduction, which is $16,100 for a single filer in 2026. Below that amount the child owes zero federal income tax and has no filing requirement. Filing is still worth it when the child funds a Roth IRA, because the return documents the earned income behind the contribution, but that is a recommendation, not a rule. Roth IRA contributions never appear on the return itself. The custodian reports them to the IRS on Form 5498, and the only thing the parent must confirm is that contributions do not exceed the child's earned income for the year.
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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.
Does Your Child Actually Have to File a Tax Return?
Usually not. A child with only earned income has to file a federal return only when those wages exceed the standard deduction, which is $16,100 for 2026. As long as the wages stay under that number, the child owes zero federal income tax and is not required to file. A return is required at a much lower threshold if the child also has unearned income like dividends or interest, but wages alone do not trigger it.
So filing is optional for most kids on payroll. It is still a good idea when your child funded a Roth IRA. The return creates a record that your child had earned income in the year of the contribution, which protects the Roth funding if the IRS ever asks. Think of it as recommended paperwork, not a legal requirement.
The filing threshold for a dependent child with only earned income is the standard deduction itself. For 2026, that is $16,100. Wages below that amount produce zero federal income tax and no filing requirement. File anyway if there is a Roth IRA involved, just to document the earned income.
The W-2 Is Not Optional: Why It Matters for the Roth IRA
A Roth IRA for a minor can only be funded with earned income. Under IRC §408A, the contribution limit for 2026 is $7,500 (or total earned income for the year, whichever is less). The IRS defines earned income to include wages reported on a W-2.
This is why paying your child with a 1099 instead of a W-2 is such a serious mistake. A 1099 turns the payment into self-employment income, which triggers self-employment tax and creates a much messier tax situation. A W-2 issued through proper payroll keeps the income clean. You can read more about that distinction in our breakdown of why a W-2 beats a 1099 when paying your kids.
The W-2 serves three purposes at once. It is your business's deduction record. It is your child's proof of earned income. And it is what makes the Roth IRA contribution legitimate in the eyes of the IRS.
Step-by-Step: How to Document Your Child's Wages Properly
Good documentation is not just a checkbox. It is your defense if the IRS ever questions whether the work was real. The Tax Court case Eller v. Commissioner (77 T.C. 934) made clear that wages paid to a child must be for genuine, age-appropriate services at a market-rate wage.
Here is what that looks like in practice:
- Write a job description. One page is fine. List the specific tasks, the expected hours per week, and the pay rate. Keep a copy in your business files.
- Keep a time log. A simple spreadsheet where your child records hours worked and tasks completed is enough. Date, task, time in, time out.
- Run actual payroll. Pay by check or direct deposit, never cash. The payment record needs to exist independently of your word.
- Issue a W-2 by January 31. The W-2 reports gross wages in Box 1. If your child is under 18 and you operate as a sole proprietorship, single-member LLC, or a spousal partnership, FICA taxes (Social Security and Medicare) are not withheld under IRC §3121(b)(3)(A). Boxes 3 and 4 stay blank.
- File the W-2 with the Social Security Administration. This is how the IRS sees it. Skipping this step means the income is invisible to the government even if your child files a return.
Our IRS documentation guide for kids on payroll goes deeper on the recordkeeping side. If you have not read it, do that before tax season.
How to Actually File Your Child's Tax Return
Your child files their own Form 1040. You do not add their wages to your return. Under IRC §73, income from a child's services is taxed to the child, not the parent.
A few things to get right on the form:
Filing status. Single. Even though you claim the child as a dependent, they file as single on their own return.
Dependent box. On the child's return, check the box that says someone else can claim them as a dependent. This matters because it limits the standard deduction to the greater of $1,350 or earned income plus $450, up to the regular standard deduction. In plain English: if your child earns $7,500, their standard deduction is $7,500. If they earn $16,100 or more, they get the full $16,100 deduction.
W-2 wages. Enter in the same place any other employee would. Line 1a on Form 1040.
Roth IRA contribution. This is where people get confused. The Roth IRA contribution does NOT go on the return. There is no deduction to claim because Roth contributions are made with after-tax dollars. The custodian (Fidelity, Schwab, whichever) reports the contribution to the IRS on Form 5498, which is issued after tax filing season. You do not file Form 5498 yourself.
What you do need to confirm: the total Roth IRA contributions for the year do not exceed earned income. That is the only rule you are responsible for enforcing.
Kiddie Tax. One thing worth knowing: the Kiddie Tax under IRC §1(g) taxes a child's unearned income (dividends, interest, capital gains) at the parent's rate if the child is under 19 (or under 24 and a full-time student). It does NOT apply to earned income. Wages your child earns in your business are taxed at the child's rate, which is almost certainly zero once the standard deduction applies. This is a real advantage of the strategy.
A Fully Worked Example: Emma, Age 14
Say you run a sole proprietorship and you hire your 14-year-old daughter Emma to manage your social media content and take product photos. She works about five hours per week at $12 per hour.
Annual wages: 5 hours x $12 x 52 weeks = $3,120
You contribute $3,120 to a custodial Roth IRA in Emma's name. The contribution is within the $7,500 limit and does not exceed her earned income for the year.
On Emma's tax return:
- W-2 wages reported: $3,120
- Standard deduction (dependent, earned income-based): $3,120
- Taxable income: $0
- Federal income tax owed: $0
- FICA withheld: $0 (sole proprietorship, child under 18, IRC §3121(b)(3)(A) exemption applies)
Your business deducts $3,120 as a legitimate payroll expense. If you are in the 24% federal bracket, that deduction saves you roughly $749 in federal income tax this year. Emma's Roth IRA grows tax-free. She starts building real financial assets at 14 while you reduce your tax bill.
That is not a vague "you could save thousands." That is $749 this year, plus decades of compounding in Emma's account.
State Taxes: Do Not Forget Them
Federal tax is usually zero. State tax is where surprises happen.
Several states have much lower standard deductions than the federal figure. California's standard deduction is around $5,540 for a single filer. New York's is around $3,100. If Emma lives in California and earns $7,500, she owes California income tax on the difference between $7,500 and $5,540, which is $1,960. At California's lowest rate, that is a small but real bill.
Check your state's rules. Some states fully conform to federal treatment of dependent children; others do not. This is one reason why having a CPA involved matters, especially if you live in a high-tax state.
Common Mistakes That Create Problems
A few things that seem minor and are not:
Paying through an S-Corp without the management company setup. If your business is an S-Corp, the FICA exemption does not apply directly. Wages paid by an S-Corp to a child are subject to payroll taxes. The workaround is a separate Family Management Company (a sole prop or LLC) that employs the children and bills the S-Corp a management fee. Our guide on setting up a family management company explains how that works.
Contributing more to the Roth IRA than the child earned. If Emma earned $3,120 and you contributed $4,000 to her Roth IRA, the $880 excess is subject to a 6% excise tax under IRC §4973 for each year it stays in the account. Catch it early and remove the excess before the filing deadline.
Confusing earned income with investment income. If Emma also has a custodial investment account that paid dividends, those dividends do not count toward the Roth IRA contribution limit. Only the W-2 wages count.
Skipping the return when your child funded a Roth IRA. A return is not required under the standard deduction, but when there is a Roth IRA a zero-tax return still creates a useful record of the earned income, so it is worth filing.
Key Takeaways
- A child with only W-2 wages is not required to file when those wages stay under the standard deduction ($16,100 for 2026); filing anyway is smart when a Roth IRA is involved, and when the child does file it is their own Form 1040, separate from the parent's return.
- Roth IRA contributions are not reported on the child's tax return. The custodian handles that with Form 5498.
- The Roth IRA contribution cannot exceed actual earned income for the year, regardless of the annual limit.
- The Kiddie Tax does not apply to earned income. Wages are taxed at the child's rate.
- FICA exemption applies in a sole proprietorship, single-member LLC, or spousal partnership when the child is under 18.
- State income tax may apply even when federal tax is zero. Check your state's standard deduction.
For a broader look at how the Roth IRA fits into the overall kids payroll strategy, see our article on Roth IRA rules for kids. And if you are weighing a Roth IRA against a UGMA custodial account for your child, the comparison in Roth IRA vs. UGMA for kids is worth reading before you decide.
Bottom Line
Get the W-2 issued. A return is not required when wages stay under the standard deduction, but filing anyway documents the earned income when there is a Roth IRA. Confirm the Roth IRA contribution does not exceed earned income. Keep the time logs and job description in a folder you can actually find. That is the whole job.
The tax savings for your business are real. The long-term benefit for your child is real. The paperwork to make it bulletproof is genuinely not that bad once you have done it once.
FAQ
Do I need to file a tax return for my child if they owe no federal income tax? Filing is not always legally required when income falls below the standard deduction, but it is strongly recommended when a Roth IRA is involved. The return creates a formal record of earned income for the year of the contribution, which is useful if the IRS ever questions the Roth IRA funding.
Where does the Roth IRA contribution appear on my child's tax return? It does not appear on the return. Roth IRA contributions are made with after-tax dollars and are not deductible. The IRA custodian reports contributions to the IRS separately on Form 5498, which is issued after the tax filing deadline.
What happens if my child's Roth IRA contribution exceeds their earned income? The excess amount is subject to a 6% excise tax under IRC §4973 for each year it remains in the account. Remove the excess contribution and any earnings on it before the tax filing deadline (including extensions) to avoid the penalty.
Can I still claim my child as a dependent if they file their own tax return? Yes. A child can file their own return and you can still claim them as a dependent, provided they meet the qualifying child rules under IRC §152. On the child's return, they must check the box indicating that another person can claim them as a dependent.
Does the Kiddie Tax apply to my child's wages from the family business? No. The Kiddie Tax under IRC §1(g) applies only to unearned income (dividends, interest, capital gains). Earned income such as W-2 wages is taxed at the child's own rate, which is effectively zero if wages fall within the standard deduction.
Sources
- IRC §3121(b)(3)(A) — FICA exemption for children employed by a parent in a sole proprietorship or spousal partnership
- IRC §73 — Income from services of a child taxed to the child
- IRC §408A — Roth IRA contribution rules
- IRC §4973 — Excise tax on excess IRA contributions
- IRC §1(g) — Kiddie Tax on unearned income of children
- IRC §63 — Standard deduction
- IRS Publication 929 — Tax Rules for Children and Dependents
- IRS Publication 15 — Employer's Tax Guide
This article is for educational purposes only and is not tax or legal advice. Consult a qualified CPA before putting your kids on payroll.