Hiring Your Kids Through an S-Corp: Why the Payroll-Tax Break Disappears in 2026

Picture a cabinet maker who pays his 16-year-old $16,100 a year to run the shop's social media, photograph finished pieces, and keep the books tidy. The child does real work at a reasonable wage. This owner is theoretical, not an actual EntityIQ client, but the numbers are ordinary and the question comes up constantly: can I keep doing this after I elect S-Corp status, and what changes if I do? The short answer is that the strategy survives the election, but the best part of it does not.

The break that makes "hire your kids" work

Two things happen when a sole proprietor puts a child on payroll. First, the wage is an ordinary and necessary business expense the parent deducts under IRC §162(a), so it comes off the top of the parent's profit. Second, the $16,100 lands on the child's own return, where the 2026 standard deduction of $16,100 for a single filer, set in Rev. Proc. 2025-32, wipes out every dollar of federal income tax. Wages are earned income, so the kiddie tax under §1(g), which only reaches a child's unearned income, never touches it.

The part people forget is the payroll tax. Wages a parent's sole proprietorship pays a child under 18 are exempt from Social Security and Medicare tax under Section 3121(b)(3)(A), and wages to a child under 21 are exempt from federal unemployment tax under Section 3306(c)(5). The IRS lays this out plainly on its Family Help page. So the family moves $16,100 out of the parent's higher bracket, the child pays no income tax, and nobody pays the 15.3% FICA or the FUTA. That is the whole appeal, and it is a genuine one.

Why the S-Corp election breaks it

The exemption is written for a trade or business run as a sole proprietorship, or a partnership in which each partner is a parent of the child. An S-Corp is neither. When you elect S-Corp status by filing Form 2553, your LLC or corporation is taxed as a corporation under Subchapter S, and for employment-tax purposes it is a separate employer, not you. Payments for a child's services are subject to Social Security, Medicare, and FUTA if the child works for a corporation, even one controlled by the child's parent. That is the IRS's own language on the Family Help page, and Treas. Reg. §31.3121(b)(3)-1 carries the same rule. The single-member LLC that qualified for the break yesterday loses it the moment its S election takes effect, because it is now a corporation in the eyes of the payroll rules.

The 2026 cost, side by side

Both owners below pay the same 16-year-old the same $16,100 for the same real work. The only variable is the entity behind the paycheck. Numbers use 2026 figures and are rounded.

In the sole proprietorship the child's wage carries no payroll tax at all. In the S-Corp the same $16,100 wage picks up $2,463 of FICA, split 7.65% employer and 7.65% employee, plus about $42 of FUTA, for roughly $2,505 a year. Multiply that by two or three kids and the S-Corp is paying four figures a year for a strategy that is free next door. The corporation does deduct its half of the FICA as a payroll-tax expense, so the true net cost is a little lower than the headline, but it is real money leaving the family every year.

The election still helps, it just costs more

Losing the FICA break does not make hiring your kids pointless inside an S-Corp. The wage is still deductible, it still lands in the child's zero or low bracket, and earned income still lets the child fund a Roth IRA up to the 2026 limit of $7,500 or their total compensation, whichever is less. Those benefits survive the election. What dies is the 15.3% freebie, and that changes the arithmetic. Before you elect, weigh the FICA you will start paying on family wages against the self-employment tax the election saves on your own distributions. For a one-owner shop that also pays two kids, the added family-wage FICA can eat a meaningful slice of the reasonable-compensation savings the S-Corp was supposed to deliver.

If you do it inside an S-Corp, do it right

The rules that keep any of this deductible do not relax for family. The wage has to be reasonable for the work actually performed under Section 162, the child has to actually perform it, and you need the same records you would keep for any employee: a real job, hours worked, a W-2, and wages paid through the same payroll you run for yourself. Pay a seven-year-old $16,100 to "consult" and you have handed the IRS an easy adjustment. The Tax Court has allowed deductions for genuine work by young children, but only where the work and the pay were real and documented. Run the child through payroll, withhold and remit the FICA the corporation now owes, and file the W-2 like any other worker.

The clean version of the rule is short. Hiring your kids is a payroll-tax freebie when you are a sole proprietor or a parent-only partnership, and a payroll-tax expense when you are an S-Corp. Neither fact should decide your entity by itself, but both belong in the same calculation. If you are weighing the election, run your own numbers in the EntityIQ S-Corp tax calculator, which handles the reasonable-salary and QBI side of the decision, then read our guide on S-Corp vs sole proprietorship to see where the election pays off before family wages enter the picture.

This article is educational and is not legal or tax advice. The numbers above are 2026 figures, and the owner is theoretical. Please consult a qualified CPA or enrolled agent before putting a family member on payroll or filing an S-Corp election.