Your child earned a W-2 from your business. Now you want to put that money to work for the next 50 years inside a Roth IRA. The question is whether the IRS lets you do that, and if so, how much.
The answer is yes, and the math is very good.
TL;DR: A child's W-2 wages from a parent's business count as earned income under IRC §73, which is exactly the income the IRS requires for Roth IRA contributions. For 2026, your child can contribute up to $7,500 or their total W-2 wages, whichever is less. Because the dependent standard deduction offsets up to $16,100 of earned income, a child earning $7,500 pays zero federal income tax and still builds a fully funded Roth IRA.
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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.
W-2 Wages from a Family Business Count as Earned Income for a Roth IRA
Yes, fully. The IRS defines Roth IRA eligibility by one thing: taxable compensation, which is the tax code's term for earned income. That includes wages, salaries, and tips reported on a W-2. Under IRC §73, when a child performs services, the income is taxed to the child, not the parent, which means the child is the one with the earned income. That earned income is what opens the Roth IRA door.
A 1099 does not work the same way. If you pay your child as an independent contractor, they owe self-employment tax on top of income tax, and the earned income calculation gets messy fast. A W-2 is cleaner, cheaper for the child, and required if you want a clean audit trail for the Roth. See the full breakdown in this post on W-2 vs. 1099 when paying your child.
There is no minimum age for a Roth IRA. The custodian account rules vary by brokerage, but the IRS has no age floor. A seven-year-old with $1,000 in W-2 wages can contribute $1,000 to a Roth IRA.
The Contribution Limit Rule: Earned Income Caps the Roth
The 2026 Roth IRA contribution limit is $7,500 per person. But there is a second cap that often bites younger or part-time workers: you cannot contribute more than your total earned income for the year.
Your child's Roth IRA contribution for the year is limited to the lesser of:
- $7,500 (the 2026 annual limit), or
- The child's total W-2 wages for the year
That means if your child earned $4,200 in W-2 wages from your business, their Roth contribution cap is $4,200, not $7,500. If they earned $10,000, the cap is $7,500.
One more thing: the money going into the Roth does not have to come directly from the child's paycheck. You can fund the Roth yourself on your child's behalf, as long as the contribution does not exceed their earned income. Many parents do exactly this. The child earns $7,500, spends their paycheck on clothes and gas, and the parent deposits $7,500 into the Roth. Perfectly fine. The IRS only checks that the contribution does not exceed the child's earned income for the year.
The Tax Math: Why This Strategy Is So Clean
Here is the part that surprises most parents the first time they see it.
Under IRC §63(c)(5), a child who can be claimed as a dependent gets a standard deduction equal to the greater of $1,350 or their earned income plus $450, capped at the full single-filer standard deduction of $16,100 for 2026. That means W-2 wages up to $16,100 are completely sheltered from federal income tax.
Worked example:
- Child: Maya, age 14
- Job: social media content creation and scheduling for mom's online boutique
- Hours per week: 5 hours
- Hourly rate: $15 (reasonable market rate for this work)
- Total annual wages: 5 hours × 50 weeks × $15 = $3,750
Maya's standard deduction for 2026 = $3,750 + $450 = $4,200, but it is capped at the lesser of that or $16,100. The deduction covers her entire $3,750 in wages.
Federal income tax owed: $0
Roth IRA contribution allowed: up to $3,750
Now project that forward. Maya contributes $3,750 to a Roth IRA every year from age 14 through 17 (four years). That is $15,000 in contributions. Assuming a 7% average annual return, that $15,000 grows to roughly $220,000 by the time Maya turns 65. Tax-free. No required minimum distributions. All because she helped with social media for a few hours a week.
And for the parent? The $3,750 in wages is a deductible business expense under IRC §162. At a 24% marginal rate, that is $900 back in mom's pocket. The family unit wins twice.
The W-2 Is What Makes the Roth Defensible
The Roth IRA contribution itself is not reported on your child's Form 1040. After-tax contributions go in after the tax return is filed, and the IRA custodian reports them to the IRS on Form 5498. The 1040 does not capture them.
So how does the IRS know the contribution was legitimate? They cross-reference Form 5498 with W-2 data. If your child has a Form 5498 showing a $5,000 Roth contribution and no W-2 on file, that is a problem. The W-2 is the proof that earned income existed.
This is why, even if your child earns below the filing threshold (earned income under $16,100 for 2026 means no federal return is legally required), it is still worth filing. Not because the law demands it, but because the return creates a documented record that the child had earned income in the year the Roth contribution was made. A thin paper trail is the single biggest mistake families make with this strategy. The details on Roth IRA rules for kids cover the custodial account mechanics if you need them.
What Happens If the Contribution Exceeds the Child's Earned Income
Excess Roth contributions are expensive. Under IRC §4973, a 6% excise tax applies to any amount contributed above the child's earned income (or above the $7,500 annual cap). That 6% penalty repeats every year the excess stays in the account.
Say your child earned $2,000 in W-2 wages but you contributed $4,000 to the Roth. The excess is $2,000. The penalty is $120 in year one. If you do not catch it, another $120 the following year. And so on.
The fix: withdraw the excess plus any earnings it generated before the tax filing deadline (including extensions) for the year of the contribution. After that deadline passes, it gets messier.
The rule to remember: contributions cannot exceed W-2 wages. Pay your child $7,500 or more if you want the full $7,500 Roth contribution. Pay them $3,000 and that is the ceiling.
Entity Structure Changes Whether This Works at All
This is the one thing parents sometimes skip past, and it matters a lot.
The FICA exemption under IRC §3121(b)(3)(A) only applies in a sole proprietorship, a single-member LLC taxed as a sole prop, or a partnership owned solely by the two parents. In those structures, wages paid to a child under 18 are exempt from Social Security and Medicare taxes. FUTA exemption under IRC §3306(c)(5) covers children under 21.
If your business is an S-Corp or C-Corp, the exemption disappears. Your child's wages go through payroll like any other employee and are subject to full FICA. The Roth math still works, but the cost goes up. One workaround is the Family Management Company structure, where the S-Corp pays a management fee to a separate sole proprietorship or LLC (owned by the parent) that employs the children. Done correctly, the exemption is preserved. See the Family Management Company setup guide for the mechanics.
If you are not sure which entity type you have and how it interacts with the payroll exemption, this guide on paying kids tax-free in 2026 walks through the combinations clearly.
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Key Takeaways
- A child's W-2 wages from a parent's business are earned income under IRC §73 and qualify for Roth IRA contributions.
- The 2026 Roth limit is $7,500 or the child's total earned income, whichever is less.
- The dependent standard deduction (up to $16,100 for 2026) means wages at or below that level owe zero federal income tax.
- Roth contributions are not on the child's 1040. The W-2 is the documentation the IRS uses to verify eligibility.
- Filing a return even when not legally required creates the paper trail that protects the Roth contribution.
- Excess contributions trigger a 6% excise tax per year under IRC §4973 until corrected.
- Entity structure matters: the FICA exemption only applies in sole props, single-member LLCs, and parents-only partnerships.
FAQ
Does my child have to file a tax return to contribute to a Roth IRA? Not legally, if their W-2 wages are under $16,100 for 2026. But filing is strongly recommended when a Roth contribution has been made. The return creates a documented record of earned income, which is what the IRS uses to verify the contribution was allowable. A missing return does not invalidate the Roth, but it removes the clearest proof you have.
Can I pay my child in cash and skip the W-2? No, not if you want the Roth to be defensible. The IRS can disallow a Roth contribution if there is no documented earned income. A W-2 is required for any employee whose wages are subject to income tax withholding, and even when withholding is zero, it is the right form for a child who will be contributing to an IRA. Cash payments with no paper trail are one of the fastest ways to invite IRS scrutiny. See Eller v. Commissioner, 77 T.C. 934 (1981) on why documentation is the whole game.
Does the Kiddie Tax affect my child's W-2 wages? No. The Kiddie Tax under IRC §1(g) applies only to a child's unearned income: dividends, interest, capital gains. W-2 wages are earned income and are taxed at the child's own rate, which is effectively zero within the standard deduction. The Kiddie Tax is irrelevant to this strategy.
What is the Roth IRA contribution limit for a child in 2026? $7,500, or the child's total W-2 wages for the year, whichever is smaller. There is no age-based reduction. A 10-year-old and a 17-year-old face the same limit.
Does contributing to a Roth IRA affect my ability to claim my child as a dependent? No. A child's Roth IRA contributions have no effect on the dependency test. You claim the child as a dependent based on support, residency, and age rules, none of which are altered by the child having a Roth IRA or W-2 wages.
Sources
- IRC §73 — Services of Child
- IRC §3121(b)(3)(A) — FICA Exemption
- IRC §3306(c)(5) — FUTA Exemption
- IRC §63 — Standard Deduction
- IRC §4973 — Excise Tax on Excess IRA Contributions
- IRS Publication 590-A — Contributions to Individual Retirement Arrangements
- IRS Publication 929 — Tax Rules for Children and Dependents
- Eller v. Commissioner, 77 T.C. 934 (1981)
Bottom line: if your child has W-2 wages from your business, they have everything the IRS requires to fund a Roth IRA. Pay them a reasonable, documented wage for real work, issue the W-2, and contribute up to their earned income or $7,500, whichever is less. Even filing a return when it is not legally required is worth doing. It takes an hour and protects decades of tax-free growth. That is the move.
This article is for educational purposes only and is not tax or legal advice. Consult a qualified CPA before putting your kids on payroll.