--- title: "How We Pay Our Daughter as an Employee (2026) | Kids Payroll" description: "We've paid our daughter as an employee since she was 5. Here's our 6-step process to legally pay our kids, reduce taxes, and fund a Roth IRA." lang: en json-ld: | [ { "@context": "https://schema.org", "@type": "BlogPosting", "headline": "How We Pay Our Daughter as an Employee (2026)", "description": "We've paid our daughter as an employee since she was 5. Here's our 6-step process to legally pay our kids, reduce taxes, and fund a Roth IRA.", "url": "https://kidspayroll.com/blog/how-we-pay-our-kids-as-employees/", "image": "https://kidspayroll.com/images/dylan-at-computer.jpg", "author": { "@type": "Person", "name": "Jennifer", "url": "https://kidspayroll.com/about/" }, "publisher": { "@type": "Organization", "name": "Kids Payroll", "url": "https://kidspayroll.com", "logo": { "@type": "ImageObject", "url": "https://kidspayroll.com/favicon.png" } }, "datePublished": "2026-02-24", "dateModified": "2026-02-24", "mainEntityOfPage": { "@type": "WebPage", "@id": "https://kidspayroll.com/blog/how-we-pay-our-kids-as-employees/" }, "isPartOf": { "@type": "Blog", "@id": "https://kidspayroll.com/blog/", "name": "Kids Payroll Blog" } }, { "@context": "https://schema.org", "@type": "FAQPage", "mainEntity": [ { "@type": "Question", "name": "Is it legal to pay a 5-year-old as an employee?", "acceptedAnswer": { "@type": "Answer", "text": "Yes. The IRS doesn't set a minimum age for employing your children in your business. The work must be real, age-appropriate, and paid at a reasonable rate. Many family businesses start paying children as young as 5 for simple tasks like shredding, stamping envelopes, and organizing." } }, { "@type": "Question", "name": "Do I need to pay payroll taxes on my child's wages?", "acceptedAnswer": { "@type": "Answer", "text": "If you're a sole proprietor or single-member LLC, wages paid to your child under 18 are exempt from Social Security and Medicare taxes (FICA). Wages to children under 21 are also exempt from FUTA. S-Corps and C-Corps don't get the FICA exemption directly." } }, { "@type": "Question", "name": "Can a child contribute to a Roth IRA?", "acceptedAnswer": { "@type": "Answer", "text": "Yes. Any child with earned income can contribute to a custodial Roth IRA, up to the lesser of their earned income or $7,000 (2025) / $7,000 (2026). The money grows tax-free and comes out tax-free in retirement." } }, { "@type": "Question", "name": "How much can I pay my child tax-free?", "acceptedAnswer": { "@type": "Answer", "text": "In 2026, your child can earn up to $16,100 (the standard deduction) without owing any federal income tax. This amount is fully deductible as a business expense on your end." } } ] }, { "@context": "https://schema.org", "@type": "BreadcrumbList", "itemListElement": [ { "@type": "ListItem", "position": 1, "name": "Home", "item": "https://kidspayroll.com" }, { "@type": "ListItem", "position": 2, "name": "Blog", "item": "https://kidspayroll.com/blog/" }, { "@type": "ListItem", "position": 3, "name": "How We've Been Paying Our Daughter as an Employee Since She Was 5 (And Why Every Business-Owner Parent Should Consider It)", "item": "https://kidspayroll.com/blog/how-we-pay-our-kids-as-employees/" } ] }, { "@context": "https://schema.org", "@type": "BreadcrumbList", "itemListElement": [ { "@type": "ListItem", "position": 1, "name": "Home", "item": "https://kidspayroll.com" }, { "@type": "ListItem", "position": 2, "name": "Blog", "item": "https://kidspayroll.com/blog" }, { "@type": "ListItem", "position": 3, "name": "How We've Been Paying Our Daughter as an..." } ] } ] --- [Kids Payroll ](/) FeaturesHow It WorksBenefits[State Laws](/state-labor-laws/)[Free Guide](/guide/)[Tax Calculator](/tax-calculator/)[About](/about/)[Blog](/blog/)[FAQ](/faq/)[Download App](https://apps.apple.com/us/app/kids-payroll-pay-your-kids/id6755955657) 1. [Home ](/) 2. [Blog](/blog/) 3. How We've Been Paying Our Daughter as an... Tax Strategy # How We've Been Paying Our Daughter as an Employee Since She Was 5 (And Why Every Business-Owner Parent Should Consider It) February 2026 12 min read _Last updated: February 2026_ ## Table of Contents - [The Big Picture: Why This Works](#big-picture) - [Step 1: Figure Out What Your Kid Can Actually Do](#step-1) - [Step 2: Set a Reasonable Hourly Rate](#step-2) - [Step 3: Open a Bank Account for Your Child](#step-3) - [Step 4: Open a Custodial Roth IRA](#step-4) - [Step 5: Track Their Hours and Pay on a Regular Schedule](#step-5) - [Step 6: Recalculate Your Health Insurance Premium](#step-6) - [The Part I Didn't Expect](#unexpected) - [Important Things to Keep in Mind](#important-notes) I was talking to a friend recently and mentioned that we've been paying our daughter Dylan (now 11) as an employee in our business since she was 5 years old. 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. Get the Guide → Her jaw dropped. She had no idea this was even legal. And honestly, that's the reaction I get almost every time I bring it up. Most business-owner parents don't know this is an option, and the ones who do are often too nervous about the IRS to actually set it up. So let me break down exactly what we do, how it works, and why it's one of the smartest financial moves we've made as a family. ![Dylan working at the computer, helping with real business tasks](/images/dylan-at-computer.jpg) Dylan helping with real business work. She's been doing age-appropriate tasks since she was 5. * * * ## The Big Picture: Why This Works Since payroll is a tax-deductible business expense, paying your child reduces your taxable income. And as long as your child's earnings stay under the standard deduction (which is $14,600 in 2025 and [$16,100 in 2026](/blog/pay-child-tax-free-2026)), they pay zero federal income tax on that money. Read that again. You move money from your business (where it would've been taxed at your rate) to your child (where it's taxed at zero), and the whole thing is a legitimate, IRS-recognized business deduction. If you're a [sole proprietor or a single-member LLC](/blog/pay-kids-through-llc), it gets even better: wages you pay your child under 18 are also [exempt from Social Security and Medicare taxes (FICA)](/blog/fica-exemption-minor-children). No FICA for you, no FICA for them. Wages to your child under 21 are exempt from federal unemployment tax (FUTA) too. We're not talking about a loophole. This is written directly into the tax code. The IRS expects business owners to take advantage of it, as long as you do it the right way. Here's how. * * * ## Step 1: Figure Out What Your Kid Can Actually Do This is where most people get stuck. They think their kid needs to be old enough to sit at a desk and answer phones. Not even close. When Dylan was 5, she was filing papers, shredding documents, applying stamps to envelopes, opening mail, and helping with basic admin tasks. Was she running our business? Obviously not. But she was doing real work that we would have otherwise done ourselves or paid someone else to do. That's the standard. Now at 11, she does property due diligence, basic customer support, transcribes call recordings, and handles more technical online tasks. She even helped build and test our Kids Payroll app. You'd be surprised what kids are capable of when you give them real responsibility instead of busywork. Check out our [50+ legitimate tasks you can pay your kids](/blog/legitimate-tasks-to-pay-kids) for ideas by age group. The key here is that the work has to be real. The IRS isn't going to question whether a 7-year-old can shred documents. But they will question it if you're paying your toddler $50 an hour to "consult." Keep it honest, keep it age-appropriate, and [document what they do](/blog/hire-kids-irs-documentation). * * * ## Step 2: Set a Reasonable Hourly Rate The IRS requires that compensation be "[reasonable](/blog/reasonable-wage-guide)" for the work performed. There's no hard rule on what "reasonable" means, but we keep it simple: we pay Dylan minimum wage in our state. Could we justify a higher rate for some of the tasks she does now at 11? Probably. But minimum wage keeps things conservative and removes any question of whether we're inflating her pay to maximize our deduction. We'd rather stay clearly in bounds than push it. If you're in a state with a higher minimum wage, that actually works in your favor. Your child earns more, your deduction is larger, and the rate is easily defensible because it's literally the legal minimum. * * * ## Step 3: Open a Bank Account for Your Child If your child is under 13, you'll need to open a joint account, since most banks require a parent on the account. If they're 13 or older, some banks allow custodial accounts where the child has more ownership. See our [guide to opening a bank account for your child](/blog/bank-account-for-child-business-wages). Either way, the important thing is that payroll goes directly into this account via direct deposit or a check. Don't pay your kids in cash and call it a day. You want a clear paper trail showing money moving from your business account to their personal account. This also creates a great teaching moment. Dylan checks her bank balance, sees her money grow, and understands the direct connection between work and income. That's not something you can teach from a textbook. * * * ## Step 4: Open a Custodial Roth IRA This is where the strategy goes from "good tax move" to "generational wealth builder." Once your child has earned income, they qualify for a [Roth IRA](/blog/roth-ira-for-kids-rules). We use Vanguard, but Fidelity and Schwab work too. You deposit their payroll earnings into the Roth IRA, up to the annual contribution limit ($7,000 in 2025 and 2026, or their total earned income, whichever is less). Here's what makes this powerful: that money grows tax-free for the rest of their life. And when they withdraw it in retirement, it comes out tax-free too. A 5-year-old with a Roth IRA has a 60-year head start on compound growth. Run the numbers on that and it gets ridiculous fast. Even modest contributions now can grow into serious money by the time your child retires. And since their income is under the standard deduction, they didn't pay income tax on the money going in either. Tax-free in, tax-free growth, tax-free out. * * * ## Step 5: Track Their Hours and Pay Them on a Regular Schedule You need to track actual hours worked and pay on a consistent schedule. We pay monthly, but you could do biweekly or whatever fits your family. We use the Kids Payroll app for this. Dylan and I actually built it together when spreadsheets stopped cutting it. It tracks tasks, logs hours, and keeps all the documentation in one place so you're not scrambling at tax time. Whatever system you use, make sure you're keeping records of what your child did, when they did it, and how much they were paid. If the IRS ever asks, you want to be able to hand over clean records, not a shoebox of sticky notes. See our [complete payroll checklist](/blog/kids-payroll-checklist) for everything you need. * * * ## Step 6: Recalculate Your Health Insurance Premium This one flies under the radar, but it's a big deal. Paying your children is a [deductible business expense](/blog/deduct-child-wages-business-expense), which reduces your adjusted gross income (AGI) and your Modified Adjusted Gross Income (MAGI). If you buy health insurance through the ACA marketplace, your premium subsidy is calculated based on MAGI. Lower MAGI = larger subsidy = lower monthly premium. If you saw my post about how we pay $178 a month for health insurance for our whole family, this is one of the strategies that helps keep that number low. It all connects: the payroll deduction lowers your income on paper, which cascades into real savings on insurance, and potentially into lower self-employment tax and qualification for other tax benefits. * * * ## The Part I Didn't Expect The financial benefits are real and they add up fast. But honestly, the part I didn't expect is how much Dylan has grown from this arrangement. She understands money in a way that most adults don't. She knows what it means to earn something. She can talk about saving, investing, and compound interest, not because we lectured her about it, but because she's living it. When she deposits her paycheck and sees her Roth IRA balance growing, that's not abstract. That's hers. She earned it. That's been worth more than any tax deduction. * * * ## A Few Important Things to Keep in Mind **Business structure matters.** The FICA and FUTA exemptions only apply if you're a [sole proprietor or a qualifying partnership](/blog/sole-prop-vs-s-corp-paying-kids) (where both partners are the child's parents). If your business is an [S-Corp or C-Corp](/blog/s-corp-pay-kids-tax-free), the corporation is the employer, not you, and those payroll tax exemptions don't apply. The income tax deduction still works, but you'll owe payroll taxes on both sides. Consider a [Family Management Company](/blog/family-management-company-setup) as a workaround. **State laws vary.** Every state has different rules around what ages children can work, how many hours they can work, and whether you need a work permit, even in a family business. Check our [state-by-state guide](/state-labor-laws/) to see exactly what applies where you live. **Keep it reasonable and documented.** Pay a [fair rate](/blog/reasonable-wage-guide) for real work. Track hours. Keep records. The IRS doesn't have a problem with this strategy when it's done legitimately. They have a problem when people fabricate work or pay unreasonable wages. **This is not legal or tax advice.** I'm sharing what works for our family. Talk to your CPA or tax advisor about your specific situation before implementing anything. * * * ## Ready to Set This Up for Your Family? We built the Kids Payroll app because we needed it ourselves — and now thousands of other business-owner families use it too. It handles task tracking, hour logging, and documentation so you stay compliant without the spreadsheet headache. Use our [Tax Savings Calculator](/tax-calculator) to see exactly how much your family could save. _Disclaimer: This article is for educational purposes only and does not constitute tax or legal advice. Consult a qualified CPA or tax professional for guidance specific to your situation._ ## Related Articles [Tax Strategy ### How to Pay Your Kids Through Your LLC (2026 Guide) Learn how to legally pay your children through your LLC, save on taxes, and build their financial future. Step-by-step guide for business owners. Read article](/blog/pay-kids-through-llc/) [Real Workflow ### How We Pay Our 11-Year-Old for Real Work Every Week (Our Actual Workflow) Every article about paying your kids explains the tax benefits. Nobody shows you what it looks like week to week without it falling apart. This is that article. Read article](/blog/real-weekly-workflow-paying-kids/) [Wealth Building ### Roth IRA for Kids: Rules, Limits & How to Start (2026) Yes, kids can have a Roth IRA! Learn the rules, contribution limits, and how to start building tax-free wealth for your child's future. Read article ](/blog/roth-ira-for-kids-rules/) 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. Get the Guide → [Calculate Your Savings](/tax-calculator/) ### Kids Payroll Transform "paying kids through your business" from a confusing tax loophole into a streamlined, automated, family-wealth engine. 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