Hiring and Paying Your Kids: W-2 vs 1099 Tax Strategy for 2026

Hiring your kids can be one of the smartest tax strategies for business owners. It’s a great way to shift income to a lower tax bracket, teach them real-life skills, and keep more money in the family.

But how you pay them matters, and choosing the wrong method could create tax problems, payroll complications, or unexpected retirement plan issues.

Here’s what you need to know about when to pay your kids through payroll and when a 1099 might make more sense.

W-2 vs. 1099: What’s the Difference

W-2 (employee):

• Treated as a regular employee
• You control their schedule, work, and tools
• Taxes are withheld You issue a W-2 at year-end

1099 (independent contractor):

• They control how and when they work
• No tax withholding
• You issue a 1099-NEC if you pay more than $600

The better option depends on your business structure, your child’s age, and what your long-term goals are.

When W-2 Payroll Makes Sense: Kids Under 18 and You’re a Sole Prop or LLC

If you are a sole proprietor or a single-member LLC and you hire your own children under age 18, you get a great payroll tax break. Their wages are not subject to Social Security, Medicare, or federal unemployment taxes.

That means:

• You get a full business deduction for the wages

• Your child pays no payroll tax

• If you keep their total wages under the standard deduction ($16,100 in 2026), they pay zero federal income tax

This only works if you’re the sole owner. If you’re an S Corporation or multi-member partnership, this exemption does not apply.

This strategy is ideal for:

• Younger kids helping with admin tasks, filing, packaging, or simple marketing work

• Businesses that want to reduce taxable income without adding payroll complexity

• Families who don’t need the child to participate in retirement plans

When to Use 1099: Know the Trade-offs

If you pay your child as an independent contractor, that income is subject to self-employment tax once it crosses $400. They will also need to file their own tax return.

But there’s a benefit: they can deduct legitimate business expenses against that income. For example, they may be able to write off supplies, software, equipment, or even a portion of their cell phone or home office.

This approach may work better if:

• Your child is doing project-based or freelance-style work

• You want to avoid payroll admin, especially as an S Corporation

• You’re not eligible for the payroll tax exemption

Be careful here. If your child looks and acts like an employee in the eyes of the IRS, you shouldn’t issue a 1099. Misclassification can trigger penalties.

S Corp Owners: Keep Payroll Clean and Retirement Plan Friendly

If you’re an S Corporation owner and have a solo 401(k) plan, adding your child to payroll can complicate things. Once you add another employee, your retirement plan may be subject to testing and sharing requirements.

Some S Corp owners choose to pay their children as 1099 contractors to keep retirement plans limited to themselves. But again, the work must be independent in nature, and the contractor relationship needs to be real.

If your child is doing tasks like editing video, creating graphics, or working flexible hours on one-off projects, the 1099 route may be fine. Just make sure you aren’t blurring the line between contractor and employee.

Tip: Set Up Clear Expense Categories and Track Everything

Whichever method you use, treat your child’s pay like any other business expense. Create separate expense categories for:

• Wages to family members

• Independent contractor payments

• Business expenses related to your child’s work

Keep time sheets, contracts, and receipts. What you can clearly track and support is what you can write off.

Quick Recap: W-2 vs. 1099 for Paying Your Kids

Free Guide

If you'd like more information on hiring your kids in your business, download our free guide at www.hiringmykids.com. For determining whether you kids file a tax return, check out the video below. 

Summary

Hiring your kids is a great strategy, but it’s not one-size-fits-all. Consider your business structure, your goals, and how involved you want your kids to be. The key is doing it right and documenting everything.

If you're not sure which method is best for your situation, let's talk. A quick conversation can help you avoid tax surprises and build a smarter family wealth plan.  Book a strategy call today.