Hiring Your Kids in Your Agency: The 2026 Numbers, and the S Corp Catch Nobody Mentions

By Craig S. Cody, CPA, Certified Tax Coach.

Hiring your kids is the most recommended tax strategy in small business. It's also one of the least often done right.

Here's the short version for 2026. You can pay your child up to $16,100 for real work in your agency, deduct every dollar, and your child owes zero federal income tax on it. The 2026 standard deduction for a single filer is $16,100, and it applies even though you still claim the child as a dependent. Add a $7,500 traditional IRA and the federal-tax-free number climbs to $23,600.

Now the part every explainer skips. Those articles are all written for a Schedule C owner. Most marketing and PR agency owners I work with run S corporations, and an S corp changes three things at once: the payroll-tax break disappears, the new Trump Account employer contribution almost certainly can't reach your own child, and the Section 199A effect flips depending on your income.

The strategy still works in an S corp. The numbers are just different, and you should know them before you run payroll.

It's in my book as one of the twelve mistakes agency owners make, and it made that list because the strategy is simple and the paperwork is where it dies.

And here's why it's worth the paperwork. We've had clients' kids finish college with more than $200,000 sitting in a Roth IRA. Not from a trust fund. From wages they earned in the family business, and a Roth contribution every year they earned them. The deduction is the entry fee. That account is the prize.

How Much Can You Pay Your Child Tax-Free in 2026?

$16,100 with no federal income tax at all. That's the 2026 standard deduction for an unmarried individual under Rev. Proc. 2025-32. A dependent's standard deduction is limited to the greater of $1,350 or earned income plus $450, capped at the regular amount, so a child earning wages gets the full $16,100.

Push past that and the ladder looks like this:

• $23,600 stays federal-tax-free if the child puts $7,500 into a traditional IRA. The 2026 IRA limit under Notice 2025-67 is $7,500, and a child can contribute up to their earned income.
• $36,000 produces federal tax of $1,240. The standard deduction and IRA deduction shelter $23,600, and the remaining $12,400 fills the 10% bracket exactly. State tax is extra.

Bradford Tax Institute ran the parent's side at a 24% federal bracket and 5% state. A sole proprietor paying a child $16,100 pockets roughly $6,614 in tax savings before Section 199A, and about $5,896 after it. At $36,000 of wages that number is $13,183. Those are their computations, and your bracket will move them. The shape holds: the deduction leaves your return, the wage lands with your child, and the family keeps both.

Pick the Roth first, and this is the part I'd underline. A child earning $16,100 or less already pays zero, so a deductible traditional IRA is worth nothing to that child. Put the $7,500 in a Roth, where it grows and comes out tax-free, and save the traditional IRA for the year the wage climbs past the standard deduction.

Do that every year from the first paycheck and you get the outcome I mentioned at the top: kids leaving school with a six-figure Roth that never gets taxed again. Ten or twelve years of contributions with compounding underneath them is how a teenager's wages turn into more than $200,000. The tax savings on your return this year are real, and they're the smallest number in this article.

Why Does the Payroll-Tax Break Depend on Your Entity?

Because the exemption is written for parents, and a corporation isn't a parent.

Section 3121(b)(3)(A) exempts "service performed by a child under the age of 18 in the employ of his father or mother" from Social Security and Medicare tax. Section 3306(c)(5) does the same for federal unemployment tax through age 20. The regulation under 3121 extends this to a partnership only if every partner is a parent of the child, which in practice means a spouse-only partnership.

The same regulation says plainly that "services performed in the employ of a corporation are not within the exception."

So if your agency is a Schedule C business or a spouse-only LLC taxed as a partnership, an under-18 child on payroll costs you no FICA and no FUTA. If your agency is an S corporation, the corporation pays 7.65%, the child pays 7.65%, and federal unemployment applies to the first $7,000. On a $16,100 wage that's about $2,500 the family hands back, a little less once the corporation deducts its half.

That's the honest cost of the S corp, and it isn't a reason to skip the strategy. A $16,100 deduction at a 32% bracket is still worth more than $5,000, and $2,500 in payroll tax against it still leaves you ahead. It's a reason to know your number before someone quotes you the Schedule C version.

Some owners set up a separate parent-owned proprietorship that employs the kids and bills the S corp for their work. It can hold. It only holds if that entity does real work for real pay with its own records, and that's a structure to design with your advisor, not copy from a blog.

What Does Section 199A Do to This?

It cuts both ways, and which way depends on your taxable income.

Wages you pay your child are a business deduction, so they reduce your qualified business income. Below the 2026 thresholds of $201,750 for single filers and $403,500 for joint filers, every $100 of wages trims your 20% QBI deduction by $20, which means the federal income tax saving on the wage runs closer to 80% of your bracket than 100%. Bradford's $6,614 dropping to $5,896 is that haircut.

Above those thresholds, the same wages help you. Your QBI deduction is capped by a formula built on W-2 wages, and putting your child on W-2 payroll raises the cap.

For agency owners this matters more than for most, because marketing, advertising and PR are on none of the thirteen specified service fields that phase QBI out entirely. Your deduction survives above the threshold, so the W-2 wage limitation is the constraint you're actually living with. Your child's wages loosen it.

How Young Can Your Child Be, and What Counts as Real Work?

There's no minimum age in the tax law. The IRS acquiesced in Eller v. Commissioner, where the owners of mobile home parks hired their children at ages 7, 11 and 12. The condition the IRS attached is the one that matters: compensation is deductible only if it's reasonable in amount, actually paid, and based on services actually rendered.

An agency has more legitimate work for a kid than most businesses. Tagging and organizing assets in the DAM. Scheduling approved social posts. Basic photo and video editing. Testing client landing pages on a phone. Cleaning up CRM records. Transcribing and time-stamping interview audio. Shredding, mail, filing. A sixteen-year-old who maintains your agency's own website is doing work you'd otherwise pay another human for.

The wage has to match the work. If you paid a developer $75 an hour and your son does the same job at half the speed, something under $37.50 is defensible. Write down how you got to the rate. Minimum wage needs no defense; anything above it does.

Child labor law is mostly on your side. Under the Fair Labor Standards Act, children of any age can work for a business entirely owned by their parents, at any hours, with two exceptions: under 16 can't work in mining or manufacturing, and under 18 can't work in any occupation the Labor Department has declared hazardous. None of those are agency jobs.

Does the Kiddie Tax Apply?

No. The kiddie tax under Section 1(g) applies to unearned income, meaning investment income. Wages are earned income. Your child's paycheck is taxed at your child's rate, not yours, which is the entire point.

Can Your Agency Put $2,500 Into Your Child's Trump Account?

This is the newest wrinkle, and for S corp owners the answer is probably no.

Trump Accounts opened on July 4, 2026. Under new Section 128, an employer can contribute up to $2,500 a year to the Trump Account of an employee or an employee's dependent, free of income tax to the employee, under a written contribution program. Proposed regulations came out on August 11, 2026, and the limit is $2,500 per employee, not per child.

Those proposed regulations define "employee" under the common-law standard and exclude self-employed individuals: partners, sole proprietors, directors acting solely as directors, and 2% S corporation shareholders. Here's the catch. Section 1372(b) defines a 2% shareholder as anyone who owns, "or is considered as owning within the meaning of section 318," more than 2% of the stock. Section 318 attributes a parent's stock to the child. Your child on your S corp's payroll is treated as a 2% shareholder for this purpose.

A sole proprietorship is different. There's no stock to attribute. Your under-18 child on a Schedule C payroll is a common-law employee in their own right, in the growth period, and eligible. The contribution stays FICA and FUTA wages under the proposed rules, which is a real cost for most employers and no cost to you, because wages to your under-18 child are already exempt.

Two cautions before you build anything. The program has to be in writing and can't discriminate in favor of highly compensated employees, and your child may be treated as highly compensated because of attribution from your income. And these are proposed rules. You may rely on them now, but the comment period runs to September 25, 2026, with a hearing on October 15, and they don't squarely address the owner's own child. Confirm before you draft the plan document.

What Records Actually Save the Deduction?

Here's what losing looks like. Lisa Fisher practiced law as a sole proprietor and brought her three children, all under nine, into the office two or three days a week. They shredded, sent mail, answered phones. She deducted $10,435, $10,313 and $8,022 over three years.

She issued no W-2s. She kept no payroll records. She had no canceled checks, no time sheets, no hourly rate. The Tax Court allowed her $250 per child per year and added negligence penalties. In Martens, a father who hired four children lost roughly 80% of the payroll deductions for one reason: no time sheets.

The paperwork isn't busywork. It's the deduction. Five pieces:

1. An employer ID number. Apply online and the IRS assigns it immediately.
2. A time sheet, completed by the child daily and turned in weekly. Handwritten is fine. Handwritten is good.
3. A documented pay rate, with a sentence on how you arrived at it.
4. W-2 payroll, paid by check or direct deposit into an account in the child's name. The W-2 wage is what triggers the payroll-tax exemption in a proprietorship, and the bank trail proves the money actually moved. Once it's paid, it's your child's money.
5. The forms, even when nothing is due. A W-4, where a child expecting no tax can write "Exempt" and must renew it every February 15. A W-2 for the child and a W-3 to Social Security. Form 941 every quarter and Form 940 every year, showing the exempt wages as exempt.

One more from experience with payroll services: tell them the child is exempt from FICA, then check the first stub. Providers withhold it by default. And a few states don't honor the exemption for state unemployment, so ask about yours.

Forget deducting food and lodging for your own minor children. You're legally liable for their support, and Rev. Rul. 73-393 closes that door.

Who This Isn't For

If there's no real work for the child to do, stop. A wage for showing up is a gift with extra paperwork, and Fisher is what happens when the IRS looks.

If you're not willing to run actual payroll, with actual forms, every quarter, this isn't for you either. Humans lose this deduction on process, not on law.

And if your agency is an S corp and the only reason you wanted it was the payroll-tax exemption, recalibrate. You're doing it for the income shift and for the Roth, and the Roth is the one that turns into six figures.

Frequently Asked Questions

How much can I pay my child tax-free in 2026?

Up to $16,100 with no federal income tax, which is the 2026 standard deduction for a single filer under Rev. Proc. 2025-32. It applies even if you still claim the child as a dependent. If the child contributes $7,500 to a traditional IRA, the federal-tax-free amount rises to $23,600. State income tax may still apply.

Do I have to pay Social Security and Medicare tax on wages I pay my child?

Not if your business is a sole proprietorship or a partnership in which every partner is the child's parent, and the child is under 18. Section 3121(b)(3)(A) exempts those wages from FICA, and Section 3306(c)(5) exempts wages to a child under 21 from federal unemployment tax. Corporations don't qualify.

Does the payroll tax exemption apply if my agency is an S corporation?

No. The regulation under Section 3121 states that services performed in the employ of a corporation are not within the exception. An S corporation paying a child $16,100 owes about $2,500 in combined FICA and FUTA between the corporation and the child. The income tax deduction still works. The payroll-tax savings don't.

How old does my child have to be to work for my business?

The tax law sets no minimum age. In Eller v. Commissioner the IRS acquiesced to wages paid to children aged 7, 11 and 12, on the condition that the pay is reasonable, actually paid, and for services actually rendered. Under the Fair Labor Standards Act, children of any age may work for a business entirely owned by their parents, except in mining or manufacturing under 16 and in hazardous occupations under 18.

Does the kiddie tax apply to wages I pay my child?

No. The kiddie tax under Section 1(g) applies only to unearned income such as interest, dividends and capital gains. Wages are earned income and are taxed at the child's own rate.

Can my business contribute to my child's Trump Account?

If you operate as a sole proprietorship, your under-18 employee-child is a common-law employee and the proposed regulations allow an employer contribution of up to $2,500 a year under a written program. If you operate as an S corporation, Section 1372(b) treats your child as a 2% shareholder through Section 318 attribution, and 2% shareholders are excluded. The rules are proposed, with comments due September 25, 2026 and a hearing October 15, 2026, so confirm before adopting a plan.

What records do I need to deduct wages paid to my child?

An employer ID number, a time sheet the child completes, a documented and reasonable pay rate, payment by W-2 payroll into an account in the child's name, and the payroll forms: W-4, W-2 and W-3, quarterly Form 941 and annual Form 940. In Fisher v. Commissioner, a parent with none of these was allowed $250 per child per year and assessed negligence penalties.

The Next Step

Most agency owners hear about this strategy from a Schedule C explainer, run an S corp, and either skip it or set it up expecting savings that aren't there. Both are avoidable. Know your entity, know your number, and do the paperwork like your child is any other employee, because to the IRS, that's exactly what they are.

If you want the longer version of how agency owners keep more of what they make, I wrote a book for agency owners. You can request a free copy at the link below.

Request your free copy

Nobody's looking out for your money but you. Let's go look together.

Related reading: The 12 Biggest Tax Mistakes Marketing Agency Owners Make, where family employment is mistake number six, and Five Tax Levers for Agency Owners at $1M of AGI, which puts this strategy next to the others it belongs with.

Craig S. Cody is a CPA, Certified Tax Coach, and retired NYPD Lieutenant. His firm works with more than 70 marketing and advertising agency owners every month, helping them keep more of what they make through proactive tax planning.

This article is general education, not advice for your specific situation. Confirm your own facts with your advisor before acting.