If your teenager already helps at the shop, answers the phone, files receipts or packs online orders, putting them on payroll can be one of the most practical year-end tax moves for a family business. The rules, however, depend on how your business is organized, and California adds steps the IRS does not require. This hiring your children Union City guide explains the 2026 federal and California rules, what must happen before December 31, 2026, and how to keep the wages deductible and defensible.
It is written for sole proprietors, husband-and-wife partnerships, S corporation owners and LLC owners in Union City, Fremont, Newark, Hayward, San Leandro, Castro Valley and the wider Bay Area who have children ages 12 to 17 (or older students home for the holidays) doing real work in the business.
Why Hiring Your Children Is a Year-End Planning Topic
Wages you pay your child move income from your tax bracket to theirs. Your business deducts the pay, and your child often owes little or no federal income tax on it. The timing matters because IRS Publication 334 says that, to be deductible, employee pay must be an ordinary and necessary expense that you pay or incur in the tax year, and it must be reasonable and for services performed. For most small businesses on the cash method, that means 2026 wages have to be paid by December 31, 2026, for work actually done in 2026.
That last part is important. If your child worked at the business over the summer or on weekends this year, you still have time to run payroll properly and document it. If they did not, you cannot create back pay for work that never happened. Use the next two months to set things up correctly for real work going forward and for 2027.
Federal Payroll Tax Rules Depend on How Your Business Is Set Up
The IRS Family Help page and Publication 15 (Circular E) spell out the family employee rules. The key question is who the employer is:
- Parent’s sole proprietorship, or a partnership where each partner is a parent of the child: wages paid to a child under 18 are not subject to Social Security and Medicare taxes, and wages paid to a child under 21 are not subject to federal unemployment (FUTA) tax. The wages are still subject to income tax withholding rules, regardless of age.
- Corporation (including an S corporation), a partnership with any partner who is not the child’s parent, or an estate: the IRS says the child’s wages are subject to income tax withholding, Social Security, Medicare and FUTA taxes regardless of age. You still get the deduction and the income shift, but not the payroll tax exemption.
- Single-member LLCs: treatment can differ between federal and California rules, and California’s family exclusion does not apply to LLCs at all (see below). Talk with us before running the first paycheck.
For S corporation owners, the child is simply another employee on the company payroll. That fits naturally with the owner payroll you already run; our S corp election and reasonable salary guide explains how S corporation payroll works in California.
California Rules: EDD Payroll Taxes, Work Permits and Workers’ Comp
EDD payroll taxes
California has its own family employment rule. According to the EDD payroll taxes FAQ and its Family Employment information sheet (DE 231FAM):
- Wages paid to a child under 18 employed by a parent, or by a partnership consisting only of parents, are not subject to Unemployment Insurance (UI), Employment Training Tax (ETT) or State Disability Insurance (SDI).
- The wages are still reportable as California Personal Income Tax (PIT) wages and subject to PIT withholding. The EDD wages overview notes that family employee wages are reportable as PIT wages even when they are not reported as subject wages.
- The exclusion covers adopted children but not stepchildren or foster children, and it ends on the child’s 18th birthday.
- It does not apply when the employer is a corporation or a limited liability company, even if one person or a married couple owns everything.
Work permits and hours
The California Department of Education work permit FAQ says a work permit is required for minors who are employed regardless of their relationship to the employer. The main family exceptions are agricultural or domestic work on property the parent owns, operates or controls, and situations where a parent is training the child in the family business without pay. Permits can be issued only to minors between 12 and 18, and hours are limited. For example, while school is in session, 14- and 15-year-olds may not work more than 3 hours a day or 18 hours a week, or during school hours. In practice, that means hiring a young child in a Union City office or retail business is usually not realistic, while a high school student with a permit from their school can be.
Workers’ compensation
The same CDE FAQ states that workers’ compensation insurance must be provided for all employees, whether or not the employee is the employer’s child. Ask your carrier to add your child before they start, and budget the premium into your savings estimate.
How Much Can the Family Save? A 2026 Example
Here is a simplified illustration. It is Accountico’s own arithmetic, not an IRS example, and it ignores interactions such as the deduction for half of self-employment tax and the qualified business income deduction, which reduce the savings somewhat.
Assume a Union City sole proprietor with $150,000 of net profit, in the 24 percent federal bracket and the 9.3 percent California bracket. A 16-year-old with a work permit has worked weekends and summer hours in the business during 2026 and earned $10,000 at a reasonable hourly rate.
- Parent’s federal income tax: about $2,400 less (24 percent of $10,000).
- Parent’s California income tax: about $930 less (9.3 percent of $10,000).
- Parent’s self-employment tax: about $1,413 less ($10,000 x 92.35 percent x 15.3 percent), because the parent’s net earnings stay under the 2026 Social Security wage base of $184,500 listed by the Social Security Administration. Above that base, only the Medicare portion is saved.
- Child’s payroll taxes: none for Social Security, Medicare or FUTA, and no California UI, ETT or SDI, because the employer is a parent’s sole proprietorship.
- Child’s federal income tax: generally $0. The IRS 2026 inflation adjustments set the single standard deduction at $16,100, and Rev. Proc. 2025-32 says a dependent’s standard deduction is the greater of $1,350 or earned income plus $450, so $10,000 of wages is fully covered.
- Child’s California income tax: possibly a small amount. The Franchise Tax Board says on its deductions page that California has a lower standard deduction than the IRS ($5,706 for a single filer for 2025).
Gross family savings in this example are roughly $4,700, before workers’ compensation premiums, payroll processing and the interactions noted above. If the same business were an S corporation, the Social Security, Medicare and California payroll tax pieces would not apply, so the savings would come mainly from the income shift.
What Makes the Wages Deductible (and Defensible)
Family payroll draws attention when the work is vague or the pay is out of line. Treat your child exactly like any other employee:
- Real, age-appropriate work. Filing, scanning receipts, data entry, social media posts, cleaning the shop, stocking shelves, packing orders and answering phones are common examples.
- A reasonable rate. A good benchmark is what you would pay an unrelated teenager in Union City or Fremont for the same tasks. Paying a 15-year-old a professional rate for light filing invites an IRS challenge.
- Written records. Keep a short job description, timesheets with dates and hours, the work permit, Form W-4 and California DE 4.
- Real payroll. Pay by check or direct deposit into an account in the child’s name on a regular schedule, not a lump sum on December 31 with no time records. Report the wages on Form W-2, and include them as PIT wages on your quarterly EDD DE 9C.
- Clean books. Record the pay as wages in your books, separate from allowances or family spending. Our bookkeeping services team can set up the right accounts.
Roth IRA for Your Child: The 2026 Bonus
Wages are compensation, and compensation is what opens the door to an IRA. For 2026, the IRS IRA contribution limits page says total contributions to all of a person’s traditional and Roth IRAs cannot exceed $7,500 or, if less, their taxable compensation for the year. Publication 590-A says Roth IRA contributions can be made regardless of age and for a year at any time during the year or by the due date of the return for that year, not including extensions. That means a child with $10,000 of 2026 wages could put up to $7,500 into a Roth IRA for 2026 until the April 2027 deadline. Most minors need a custodial account opened by a parent.
Because the child usually pays little or no tax on the wages, Roth contributions can grow for decades and, under the usual Roth rules, come out tax-free in retirement. If you are also saving for yourself before year-end, see our Solo 401(k) vs. SEP IRA 2026 guide.
Hiring Your Children Union City Checklist Before December 31
- Confirm your entity type (sole proprietorship, parent-only partnership, S corporation or LLC) and which federal and EDD rules apply.
- Get a California work permit through your child’s school if they are under 18 and the work is not one of the narrow exceptions.
- Add your child to workers’ compensation coverage before their first shift.
- Collect onboarding forms: Form W-4, California DE 4, and the usual new-hire paperwork.
- Write a job description and set a reasonable hourly rate based on what you would pay an unrelated worker.
- Track hours and run payroll by December 31, 2026 for work actually performed in 2026, paid into the child’s own account.
- Report correctly in early 2027: Form W-2 and California DE 9C. Our year-end payroll checklist lists the February 1, 2027 filing dates.
- Open a custodial Roth IRA and contribute for 2026 by the April 2027 deadline, if it fits your family plan.
Hiring Your Children Union City FAQs
Can I hire my child in my Union City business and deduct the wages?
Yes, if the child is a real employee doing real work. IRS Publication 334 says employee pay is deductible when it is an ordinary and necessary expense, paid or incurred in the tax year, reasonable, and for services actually performed. Keep timesheets, a job description and records showing the pay went to the child.
Do I have to withhold Social Security and Medicare tax from my child’s paycheck?
It depends on the business. The IRS says wages paid to a child under 18 by a parent’s sole proprietorship, or by a partnership in which each partner is a parent of the child, are not subject to Social Security and Medicare taxes, and wages to a child under 21 are not subject to FUTA. If the business is a corporation, including an S corporation, or a partnership with a non-parent partner, those taxes apply regardless of age. The wages are still subject to income tax withholding rules.
Does my child pay federal income tax on the wages?
Often not, at typical part-time amounts. For 2026 the IRS standard deduction for a single filer is $16,100. For someone who can be claimed as a dependent, Rev. Proc. 2025-32 limits the standard deduction to the greater of $1,350 or earned income plus $450, which still covers wages up to the $16,100 cap. Unearned income such as investment earnings follows different rules.
What about California payroll taxes?
The EDD says wages paid to a child under 18 employed by a parent, or by a partnership made up only of parents, are not subject to Unemployment Insurance, Employment Training Tax or State Disability Insurance, but they are reportable as California Personal Income Tax wages and subject to PIT withholding. The California exclusion does not apply if the employer is a corporation or an LLC, and it does not cover stepchildren or foster children.
Does my child need a work permit to work in my family business?
Generally yes. The California Department of Education says a work permit is required for minors employed regardless of relationship, with exceptions for agricultural or domestic work on property the parent owns, operates or controls, and for unpaid training. Permits can be issued only to minors between 12 and 18 years of age, and hours limits apply, such as no more than 3 hours a day and 18 hours a week for 14- and 15-year-olds while school is in session. The CDE also says workers’ compensation insurance must cover your child.
Can my child open a Roth IRA with the wages?
Yes, as long as the child has taxable compensation. For 2026, the IRS says total contributions to all traditional and Roth IRAs cannot exceed $7,500 or, if less, the person’s taxable compensation for the year. Roth contributions for 2026 can be made until the April 2027 filing due date, not including extensions. A minor usually needs a custodial account opened by a parent.
Get Help With Hiring Your Children Union City Payroll
Family payroll works best when the entity, work permit, workers’ compensation, payroll filings and books all line up before the first paycheck. Accountico helps family businesses in Union City, Fremont, Hayward, Newark, San Leandro, Castro Valley and across the Bay Area decide whether hiring a child makes sense, run compliant payroll services, and fold the numbers into year-end tax strategy and planning and 2026 tax preparation.
Book a free 30-minute consultation or contact our team before December 31, 2026.
Accountico Inc
33476 Alvarado Niles Rd, Ste A007, Union City, CA 94587
(510) 400-9341
Disclaimer: This article is general information for small business owners and is not tax, legal, payroll or accounting advice. Federal and California rules, rates, deadlines and labor law requirements change, and individual situations differ. Confirm requirements with the IRS, the EDD, the Franchise Tax Board, your child’s school, your insurance carrier, or a qualified tax professional before acting.
