The One Big Beautiful Bill Act (OBBBA) made permanent the Tax Cuts and Jobs Act (TCJA) elimination of personal exemptions.1 This makes your child worthless to you as a personal exemption on your Form 1040.
But there is a way to get even or, perhaps, much more than even.
Let’s first set the stage. Because of the OBBBA, for this year (2025) and later, the standard deduction for a single taxpayer begins at $15,750 and increases every year for inflation.2
The new standard deduction means that a single taxpayer such as your child can earn up to $15,750 in W-2 wages and pay not a penny in federal taxes.
As the owner of a business, you have the advantage of being able to hire your child to work in your business, and that creates tax-saving opportunities for both you and your child.
The big-dollar benefits of hiring your child go to the Form 1040, Schedule C taxpayer and the husband-and-wife partnership because such businesses are exempt from FICA on the wages they pay to their children who are under age 18.3
The parental proprietorship and partnership hiring rules also exempt wages paid to a child under the age of 21 from unemployment taxes.4
Keep in mind that the single-member LLC that did not elect corporate tax treatment is taxed as a sole proprietorship for federal tax purposes.
Example. You employ your 9-, 11-, and 13-year-old children to work in your proprietorship. You pay them a fair market wage for the work they perform, and that just happens to equal $15,750 per child and totals $47,250 for the year.
Children’s federal taxes. Zero! That’s right—the children pay zero in federal taxes. No income taxes. No employment taxes.
Your federal taxes. You claim the $47,250 W-2 wages deduction on your Schedule C, where it reduces both your income taxes and your self-employment taxes. If you are single with Schedule C income and taxable income of $155,000, you save at the 38.13 percent rate, for a total of $18,016.5
Of course, your tax rate is likely higher or lower than the example above, but you get the idea of how this works to your benefit. No taxes to the child and tax savings to you. Yes, you are having your cake and eating it too.
When you hire a child under age 18 as a Form 1040, Schedule C business or a partnership with only the child’s parents, the business is exempt from paying Social Security, Medicare, and federal unemployment taxes.
S and C corporations and non-spouse partnerships do not qualify for this benefit. They have to pay the payroll taxes on all employees—period. There is no parental payroll benefit.
(Similarly, the self-employed individual or the spouse-only partnership with a child age 21 or over does not qualify for any employment tax breaks.)
This obviously changes the game. Let’s look at the three children above and apply the payroll taxes. Here’s how:
·
$3,615 employer FICA taxes on the $47,250 in wages paid to the three children
·
$3,615 employee FICA taxes extracted from the three children’s $47,250 in wages
·
$1,400 in state and federal unemployment (this could be a little higher or lower depending on the employer’s experience with unemployment and the unemployment condition of the state where the business resides)
The payroll taxes above have left the pockets of either the children or the business entity. But the bottom line is that the money is now with the governments.
All is not lost, and in most cases, this actually works out pretty well.
The business does get a tax deduction for its FICA and unemployment taxes. Let’s say this is your business and you operate it as an S corporation, so the net income passes to you. The tax deduction for hiring your three children is $47,250 of wages paid, plus $3,615 in FICA and $1,400 in unemployment taxes, for a total of $52,265.
If you are in the 35 percent tax bracket, you save $18,293 on your $52,265 deduction.
Remember, the children pay no income taxes, although they did suffer the $3,615 in FICA taxes.
Here’s the tally for the family:
Cash received from the government
$18,293
Corporate cash paid out for FICA
-$3,615
Corporate cash paid out for unemployment taxes
-$1,400
Children’s cash paid out for FICA
-$3,615
Government payment to the family
$9,663
For hiring your children in your S corporation, the government paid you (your family) $9,663 so each of your three children could have $14,545 in federal tax-free cash ($15,750 - $1,205 FICA tax).
Although Schedule C taxpayers do better, this is pretty honking good.
Key point. In the example in this section, the under-age-18 payroll tax breaks don’t apply. But the savings are significant. What makes the strategy work is the OBBBA standard deduction for 2025.
It’s unlikely that your savings will equal the calculation above. You might save more or less. Use the example above with your tax rates to calculate your exact savings.
If you can hire your children, the OBBBA did you a favor with the new $15,750 standard deduction.
The biggest benefits accrue to the Form 1040, Schedule C business or the spouse-only partnership when such a business can hire the under-age-18 child of the parent (or parents, in the case of the partnership). Why? Because with such a business, both the business and the parents are exempt from FICA taxes.
As you see in this article, avoiding payroll taxes certainly helps, but those businesses that have to pay the payroll tax can achieve significant family tax benefits with the hire-your-child strategy.