In NFIB’s Monthly Survey in May, 34% of small business owners reported job openings they couldn’t fill, and 18% cited labor quality as their single most important problem. If you hire your child to work in your business this summer to fill a need, there can be benefits to your child and to your business. Your child can gain work experience and earn some money. Your business can obtain needed labor and deduct wages paid to your child. There some employment tax rules that generate considerable tax savings for your child and your business. And there are other tax breaks to consider.
Tax savings and tax breaks include
Income taxes
Onboard your child as you would any other employee so that you can deduct wages you pay (assuming you pay a reasonable amount for the work performed). Have your child complete Form W-4, Employee’s Withholding Certificate. You child may claim exemption from withholding for summer wages if he or she meets both of the following conditions:
- There was no federal income tax liability in 2025, and
- The child expects to have no federal income tax liability in 2026.
Check the box in the Exempt from withholding section on the form.
Tax-free income for the child. Depending upon total earnings from the job and other sources for the year, your child may not have to pay any federal income tax on the wages received. In 2026, a child who is the parent-owner’s dependent can earn up to $16,100 in 2026 tax free. In fact, a federal income tax return does not need to be filed if earned income is $16,100 or less.
Retirement savings. You can put your child on the road to a lifetime habit of savings and a financially comfortable retirement by encouraging your child to save some earnings in a Roth IRA (the child likely does not need the deduction created by a traditional—deductible—IRA). This will create tax-free income in the future. For 2026, the contribution limit is 100% of earnings, up to a maximum contribution of $7,500.
If your child does not contribute his/her earnings, you can make a contribution on your child’s behalf. This must be based on the child’s earnings. There is no minimum age requirement for having a Roth IRA.
FICA tax
Generally, earnings of a child are subject to FICA, which means both the child and the employer pay the tax. But if the child is under age 18, payments to the child are not subject to FICA if the parent’s business is:
- A sole proprietorship
- A one-person limited liability company (a disregarded entity)
- A partnership in which the only partners are both parents of the child
The exemption can apply to stepchildren if they live with the business owner.
FUTA tax
Generally, earnings of a child are subject to FUTA tax, which is the federal unemployment tax. But as in the case of the FICA exemption, there’s a FUTA tax exemption for a child under age 21. Again, the parent must be a sole proprietor, the member of a one-person LLC, or both parents are the sole partners of a partnership.
State employment taxes
Check on state tax rules, which may vary from the federal rules. For example, in Florida, wages of an owner’s child under 18 are not subject to state unemployment tax; the 21-year old threshold used for FUTA does not apply.
Final thought
While there are benefits to both the business and your child in a work arrangement, there can be issues to face. For example, hold your child to the same rules for other employees; don’t show favoritism, which can create bad feelings among the staff. And because this is a family situation, the IRS may apply more scrutiny to the deduction for wages paid to the child, so be sure to document the work performed. Acknowledge potential problems and handle them wisely.
Read more on the subject of hiring practices for your business in this list of blogs.
