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Small business owners have unique tax tools available to their families that W-2 employees cannot access: hiring children in the business (with full FICA exemption under age 18), funding Roth IRAs for kids with earned income, layering health and education benefits, and stacking the Child Tax Credit + Dependent Care FSA + education credits. Done well, these strategies can keep $5,000-$15,000 per year in family wealth that would otherwise have gone to federal taxes. Here is the 2026 framework.
Hiring your child to work in your sole proprietorship or family-owned business creates one of the most tax-efficient family arrangements available in the tax code. Three tax benefits stack:
Combined effect: a parent in the 32% bracket pays the child $15,000 for legitimate summer work. Business saves ~$4,800 in federal tax. Child owes $0 in income tax (earned income below standard deduction) and $0 in FICA (under 18 in qualifying entity). Net: $4,800 stays in the family that would have been federal tax.
The IRS routinely audits family employment arrangements. Three requirements:
Document everything: timesheets with actual hours, signed acknowledgement of work performed, payment through the business bank account (not cash), W-2 issued at year-end. Keep records 7 years.
Yes — this is one of the highest-leverage moves in personal finance. A child with earned income can contribute up to the lesser of their earnings or the IRA contribution limit ($7,000 in 2025) to a Roth IRA. The contributions can be made by the child or by a parent/grandparent on their behalf.
Roth IRA money grows tax-free for life and is withdrawn tax-free in retirement. A child contributing $7,000 per year from age 12 to age 22, then never contributing again, would have roughly $1.4 million at age 65 (assuming 7% annual returns). Most adults don’t have $1.4M in retirement savings.
The contribution must come from the child’s own earned income (wages from real work). The parent can choose to leave the child’s wages with the child, or pay the child wages AND fund the Roth on the child’s behalf (effectively gifting back the same amount). Either way, the Roth IRA gets funded.
The kiddie tax is the IRS’s response to parents shifting investment income to children’s lower tax brackets. Unearned income (interest, dividends, capital gains, royalties) above $2,700 (2025) for a child under 18 (or full-time student 18-23 whose earned income is less than half their support) is taxed at the parent’s marginal rate.
Practical implications:
Strategy: keep investment income for children below the kiddie tax thresholds, OR use 529 plans (tax-free growth, not subject to kiddie tax), OR use UTMA/UGMA accounts strategically with the threshold limits in mind.
The Child Tax Credit was $2,000 per qualifying child under age 17 in 2025, with $1,700 of that refundable. Phase-out at modified AGI $200,000 single / $400,000 MFJ. Each qualifying child needs a Social Security Number — ITIN-only children do not qualify.
Under the 2017 Tax Cuts and Jobs Act, the elevated $2,000 credit is scheduled to revert to $1,000 per child in 2026 unless Congress extends. As of mid-2026, the credit’s exact status depends on legislative action — track IRS guidance at irs.gov.
Additional credits to coordinate: Credit for Other Dependents ($500 per dependent child 17+ or other qualifying relative), Earned Income Tax Credit (for lower-income working families), Adoption Credit (up to $17,280 per eligible child in 2025).
A Dependent Care Flexible Spending Account is an employer benefit that lets employees set aside up to $5,000 per household per year in pre-tax dollars to pay for qualified dependent care expenses.
Qualified expenses include daycare, after-school programs, summer day camps (NOT overnight camps), and care for a disabled spouse or dependent. The dependent must be under 13 OR unable to care for themselves regardless of age.
Tax savings: contributions avoid federal income tax (22-37%) AND FICA (7.65%) AND most state income tax. Combined savings of 30-45% on the $5,000 contributed amount. The Dependent Care Tax Credit on Form 2441 is a separate but coordinated benefit — you cannot use the same expenses for both.
Use-it-or-lose-it rule applies — unspent FSA balance at year-end is forfeited (some plans have a grace period or limited carryover). Plan contributions based on conservative estimate of actual expenses.
Five additional family-tax levers:
Family tax strategy is most powerful when it stacks with other planning levers — retirement contributions, health benefits, business deductions, and estate planning. Let’s design an integrated family tax plan for your specific situation.
Until next time.
Yes, and it’s one of the most tax-efficient family strategies available. Children under 18 working for a parent-owned sole proprietorship or partnership (where both partners are parents) are NOT subject to FICA, FUTA, or federal income tax withholding on their wages (assuming wages are at or below the standard deduction, $15,000 in 2025). The business deducts the wages as a normal expense. Children can contribute their earned income to a Roth IRA, creating tax-free retirement savings starting at age 7+.
A child can earn up to the standard deduction ($15,000 in 2025) in earned income without owing federal income tax. The earnings must be for legitimate work performed for the business (filing, social media, basic admin). The IRS standard: the work must be age-appropriate and the wage must be reasonable for the work performed. Maintain timesheets and pay through the business bank account, just like any other employee.
The kiddie tax applies to UNEARNED income (interest, dividends, capital gains) above $2,700 (2025 threshold) for children under 18 and full-time students 18-23 whose earned income doesn’t exceed half their support. The portion above the threshold is taxed at the PARENT’S marginal tax rate, not the child’s. The kiddie tax prevents parents from shifting investment income to children’s lower brackets. Earned income (wages from a real job) is NOT subject to kiddie tax.
The Child Tax Credit was $2,000 per qualifying child under 17 in 2025, with $1,700 refundable. Phase-out at modified AGI $200,000 single / $400,000 MFJ. Under the 2017 TCJA, this elevated credit is scheduled to revert to $1,000 per child in 2026 unless Congress extends. As of mid-2026, check current status — the credit has been a frequent legislative target. Children must have an SSN to qualify; ITIN-only children do not.
A Dependent Care Flexible Spending Account lets employees set aside up to $5,000 per household per year in pre-tax dollars for qualified dependent care expenses (daycare, after-school programs, summer day camps for children under 13, care for a disabled dependent). The savings: 22-37% federal income tax + 7.65% FICA = roughly 30-45% effective tax savings on the contributed amount. Note that the Dependent Care Tax Credit on Form 2441 is separate but coordinates with the FSA.
Adam Traywick, CPA is the President and founding CPA of Adam Traywick, LLC, a Fort Worth small-business accounting firm. He has over 20 years of experience helping small business owners across home-services trades, hair salons, real estate, and insurance agencies optimize taxes, run cleaner books, and avoid the surprises that come from once-a-year accountants.
