Hiring Your Child in Your Sole Proprietorship: The FICA-Exempt Wage Strategy

Q: Can I pay my child through my freelance business and avoid payroll taxes?

Yes, if your business is a sole proprietorship (or a partnership in which each partner is the child's parent) and the child is under 18. IRC §3121(b)(3)(A) exempts wages paid by a parent to their child in this structure from Social Security and Medicare (FICA) tax entirely — no employer or employee share. IRC §3306(c)(5) separately exempts the same wages from federal unemployment tax (FUTA) for a child under 21. The wages still have to be real pay for real work the child actually performs, and reasonable for that work.

Q: Does the FICA exemption still apply if my business is an S-corp?

No. Both exemptions apply only to a sole proprietorship or a parents-only partnership. The moment the business is any kind of corporation — including an S-corp, even one wholly owned by the parent — wages paid to a minor child are subject to full FICA (and FUTA if applicable), the same as wages to any unrelated employee. This is a genuine cost of an S-corp election that's easy to overlook: a strategy that saves real payroll tax as a sole proprietorship disappears the moment you incorporate.

Q: How much can I pay my child tax-free?

For 2026, a dependent's standard deduction is the greater of $1,350 or their earned income plus $450, up to the regular single filer amount of $16,100. A child with no other income can therefore earn up to $16,100 in wages from the family business with $0 federal income tax owed on it, as long as the wage is reasonable compensation for real work performed — you can't simply assign an arbitrary number to maximize the deduction.

Q: Is my child's wage income subject to the kiddie tax?

No. The kiddie tax applies only to a child's unearned income — investment income like interest, dividends, and capital gains — not to earned income from actual work. Wages paid for real work in the family business are taxed under the child's own regular rates and brackets, with no kiddie-tax exposure regardless of how much the parent's own tax bracket is.

Q: Can my child use the wages to contribute to a Roth IRA?

Yes. Any individual with earned income, regardless of age, can contribute to a Roth IRA up to the lesser of their earned income or the annual limit — $7,500 for 2026. A child paid $12,000 in wages from the family business could contribute the full $7,500 limit, starting tax-advantaged retirement savings decades earlier than most workers ever do, funded entirely by wages the parent's business already deducted.

Published: September 4, 2026 · Reading time: 9 min

TL;DR: Pay your minor child real wages for real work in your sole proprietorship, and the wages are exempt from Social Security and Medicare tax (IRC §3121(b)(3)(A), under age 18) and federal unemployment tax (IRC §3306(c)(5), under age 21) — a full Schedule C wage deduction on Line 26 that cuts your income tax and self-employment tax, with no payroll tax owed on the other side. The child's earned income isn't subject to the kiddie tax and can absorb the full $16,100 2026 standard deduction tax-free, plus fund up to a $7,500 Roth IRA contribution. The trap: none of the FICA/FUTA exemption survives an S-corp election — the same wage becomes fully taxed payroll the moment your business is a corporation.

Most family-business tax strategies are marginal. This one is not: it's a real wage, a real Schedule C deduction, and a genuine exemption from two payroll taxes that apply to every other employee you'll ever hire — available only to a sole proprietor, and only for as long as you stay one.

The Rule, From the Statute

Two separate Internal Revenue Code sections do the work:

IRC §3121(b)(3)(A) excludes from FICA (Social Security and Medicare) tax any service performed by a child under 18 "in the employ of his father or mother." Treas. Reg. §31.3121(b)(3)-1 and the IRS's own Family Help guidance apply that exclusion only when the parent's trade or business is a sole proprietorship — or a partnership in which every partner is a parent of the child. There's no employer share and no employee share; the wages simply never enter the FICA system.
IRC §3306(c)(5) provides the parallel exemption from FUTA (federal unemployment tax), with a broader age cutoff: a child under 21.

Both exemptions require the same underlying business structure. A single-member LLC taxed as a disregarded entity (still filing Schedule C) qualifies the same as an unincorporated sole proprietorship. Anything taxed as a corporation does not — more on that below.

What "Real Work, Reasonable Pay" Actually Requires

The exemption doesn't turn a gift into a deduction. Every ordinary wage-deduction rule under §162 still applies:

The work has to be real. Filing, data entry, social media content, inventory organizing, basic bookkeeping tasks, modeling for product photos — anything age-appropriate that the business would otherwise pay someone else to do.
The pay has to be reasonable for that work, judged the same way you'd judge any employee's wage — not an arbitrary number chosen to maximize the deduction.
Keep records like any other employee: hours worked, tasks performed, and a W-2 at year-end. FICA and FUTA don't apply, but federal income tax withholding still does, regardless of the child's age — have the child complete a Form W-4, on which a child who expects no tax liability for the year may claim exemption from withholding.
State child-labor law still applies. The federal tax exemption doesn't override state rules on a minor's permitted hours or type of work — check your state's requirements before assigning tasks.

The Trap: An S-Corp Election Erases the Exemption

This is the single most common way freelancers accidentally lose this strategy. Both §3121(b)(3)(A) and §3306(c)(5) are written around the sole proprietorship (or parents-only partnership) structure specifically. The moment your business operates as any kind of corporation — including an S-corp, even one you own 100% of and where you're the child's only parent involved — the exemption is gone entirely. Wages to your child through an S-corp are subject to the exact same FICA and FUTA as wages to an unrelated employee.

If you're weighing an S-corp election for the self-employment-tax savings on your own compensation, factor this in: the election can cost you a real, separate payroll-tax savings on any wages you'd otherwise pay your minor children. For a freelancer actively using this family-wage strategy, that's a genuine offset against the S-corp's own SE-tax benefit, not merely a footnote.

Worked Example: A $12,000 Wage to a 15-Year-Old

Marcus runs a solo marketing consultancy as a sole proprietor with $90,000 in Schedule C net profit before any family wages, single, and well under the QBI threshold. His 15-year-old daughter manages the business's social media content and handles data entry for client reports, working roughly eight hours a week — real, documented work, paid at a reasonable $12,000 for the year.

The business side:

The $12,000 wage is fully deductible on Schedule C Line 26, dropping Marcus's net profit to $78,000
Self-employment tax savings from the reduced net profit: $1,695.55
After also accounting for the reduced QBI deduction (QBI shrinks along with net profit, and the 20%-of-taxable-income overall limit binds both before and after) and the smaller half-SE-tax offset, Marcus's final taxable income drops from $54,033.36 to $45,111.58 — an $8,921.78 reduction
That reduction straddles the 2026 single-filer bracket boundary at $50,400: $3,633.36 of it comes out of the 22% bracket and the remaining $5,288.42 out of the 12% bracket, for $1,433.95 in income tax saved — not a flat 22% of the whole reduction
Total tax savings to Marcus's business: $3,129.50 ($1,695.55 SE tax + $1,433.95 income tax)
No FICA or FUTA is owed on the $12,000 — neither an employer share from the business nor an employee share withheld from the daughter's pay (income tax withholding still applies, per the W-4 point above, unless the daughter claims an exemption from withholding)

The child's side:

2026 dependent standard deduction: the greater of $1,350 or (earned income + $450), capped at $16,100 — for $12,000 in wages, that's $12,450, which fully absorbs the $12,000 in income, leaving $0 in federal taxable income and $0 tax owed
The wages are earned income, so the kiddie tax never applies, regardless of Marcus's own bracket
With $12,000 in earned income, she can contribute up to the full 2026 Roth IRA limit — $7,500 — starting tax-free retirement growth before she's even old enough to drive

If the same $12,000 had instead been paid through an S-corp, the wage deduction and income-tax result for the business would be similar, but FICA would apply in full: $1,836.00 in combined employer-and-employee Social Security and Medicare tax that a sole-proprietorship structure avoids entirely on the identical wage.

Common Mistakes

Paying a child who does no actual work. The IRS can and does disallow wage deductions for children who perform no real services — this is a real employment relationship for tax purposes, not a distribution disguised as a wage.
Overpaying relative to the work. An unreasonably large wage for minimal work invites the same scrutiny an unreasonable wage to any employee would.
Running the strategy through an S-corp or a partnership with a non-parent partner and expecting the FICA/FUTA exemption to still apply — it doesn't.
Skipping the W-2 or the W-4. No FICA/FUTA withholding doesn't mean no reporting requirement — a W-2 is due once wages reach the 2026 information-return threshold of $2,000 (raised from $600 by OBBBA for payments after 2025), and regardless of that threshold, whenever any income tax was or should have been withheld. Have the child file a Form W-4 rather than assuming no withholding applies.

Frequently Asked Questions

Can I pay my child through my freelance business and avoid payroll taxes?

Yes, if your business is a sole proprietorship (or a parents-only partnership) and the child is under 18 for FICA, under 21 for FUTA. The wages must be real pay for real work and reasonable for that work.

Does the FICA exemption still apply if my business is an S-corp?

No. The exemption applies only to a sole proprietorship or a parents-only partnership. Any corporation, including an S-corp you fully own, loses the exemption entirely.

How much can I pay my child tax-free?

Up to the greater of $1,350 or (earned income + $450), capped at $16,100 for 2026 — meaning a child with no other income can earn up to $16,100 in wages with $0 federal income tax, as long as the pay is reasonable for real work.

Is my child's wage income subject to the kiddie tax?

No. The kiddie tax applies only to unearned (investment) income, never to wages for real work performed.

Can my child use the wages to contribute to a Roth IRA?

Yes — any earned income supports a Roth IRA contribution up to the lesser of that income or the annual limit, $7,500 for 2026.

Authoritative References

Document Every Family Wage Payment Without the Year-End Scramble

A family-wage strategy only survives scrutiny with real records: hours, tasks, and payment dates that match what you actually paid. CentSense logs every business payment the moment it happens, so the wages you paid your child are documented alongside every other business expense — no reconstructing a year of payments from memory in April. Free tier includes 10 AI scans per month; Solo is $5/month for unlimited scanning and mileage logging.

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This guide is general education for U.S. freelancers and independent contractors filing for the 2026 tax year. It is not personalized tax advice. Whether your child's work and pay meet the reasonable-compensation standard, and how your state's child-labor laws apply, are facts a CPA or employment-law professional should review before you start.

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