Hiring Your Children: Tax-Free Income, FICA Exemption, and the Sole Proprietorship Advantage

By Yarik Yarosh, CPA ·September 5, 2026 ·3 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

Hiring children to work in a family business is one of the few strategies that creates a deduction for the parent while generating tax-free income for the child. A sole proprietorship (or single-member LLC taxed as a sole proprietorship) that employs a child under age 18 is exempt from FICA taxes on the child’s wages, and the child pays zero federal income tax on earnings up to the standard deduction amount ($15,000 in 2025). The business deducts the wages as an ordinary expense, reducing both income tax and SE tax.

✓Key takeaway

Hiring children: tax benefits and rules:

FICA and FUTA exemptions (IRC 3121(b)(3) and 3306(c)(5)):

Children under age 18 working for a parent’s sole proprietorship: exempt from FICA (Social Security and Medicare)
Children under age 21 working for a parent’s sole proprietorship: exempt from FUTA
These exemptions DO NOT apply if the business is a corporation (including S-Corp) or a partnership where both parents are not the only partners

Income tax benefit for the child:

The child’s standard deduction in 2025 is $15,000
A child earning $15,000 or less from the family business owes $0 in federal income tax
Combined with the FICA exemption, the first $15,000 of wages is completely tax-free to the child

Deduction benefit for the parent:

The $15,000 in wages reduces Schedule C income
At a 32% combined rate (24% income + 7.65% SE), the deduction saves $4,800

Requirements:

Real work. The child must perform actual services. Filing, cleaning, data entry, social media management, product packaging, labeling, and assisting at events are common legitimate tasks.
Reasonable pay. The rate must be reasonable for the work performed. $10-$20/hour for age-appropriate tasks is generally defensible. Paying a 10-year-old $50/hour is not.
Documentation. Maintain time records, a job description, and pay records. Treat the child as you would any other employee (except for the FICA/FUTA exemptions).
W-2 required. Issue a W-2 at year-end. File Form 941 (quarterly payroll return) even though the FICA amount is $0 for exempt wages.

What does the complete strategy look like?

Hypothetical example

Round numbers. A sole proprietor earns $100,000 in Schedule C income. The owner has two children, ages 14 and 16, who work in the business 10 hours/week during summer and 5 hours/week during the school year (approximately 500 hours/year each). Pay rate: $15/hour.

Each child earns: 500 hours x $15 = $7,500/year Total wages for both children: $15,000

Tax impact on children:

Each child’s W-2: $7,500
Standard deduction: $15,000
Taxable income: $0
FICA: $0 (under 18, sole proprietorship exemption)
Total tax per child: $0

Tax impact on parent:

Schedule C deduction: $15,000
SE tax savings: $15,000 x 15.3% x 92.35% = $2,119
Income tax savings: $15,750 x 24% = $3,600
Total tax savings: $5,719

What the children do with the money:

Contribute to a Roth IRA: each child can contribute up to their earned income ($7,500) to a Roth IRA
The Roth IRA grows tax-free for decades
At age 65, $7,500/year contributed from ages 14-17 ($30,000 total) at 8% average return grows to approximately $1.1 million, entirely tax-free

The family-level benefit:

Parent saves $5,719 in taxes
Children earn $15,000 tax-free
Children contribute to Roth IRAs ($15,000/year)
Children learn work habits and financial responsibility
The business gets legitimate help

Illustrative numbers only, not a real client and not advice for your facts.

The most important requirement is that the work is real and the pay is reasonable. The IRS has disallowed deductions where children were “employed” but had no documented duties, no time records, and no evidence of actual work performed. Courts look for the same evidence they would in any employer-employee relationship: time sheets, job descriptions, and output consistent with the hours claimed.

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Cite this page

Yarik Yarosh, CPA. "Hiring Your Children: Tax-Free Income, FICA Exemption, and the Sole Proprietorship Advantage." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-hiring-children-tax-benefits

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.