Paying your child, grandchild, or other relative can be one of the most powerful tax-saving strategies availableto business owners.
Most advisors focus on putting younger children on payroll. That’s a good strategy.
But what many overlook is a lesser-known approach that can work for older children and even other family members—and in the right circumstances, it can eliminate payroll taxes entirely while shifting income into alower tax bracket.
This article explains a little-known, high-impact strategy that, when properly structured, allows you to deduct income at your higher rate while your family member reports that income at significantly lower rates, perhapseven zero—and with no payroll tax cost.
Hire Your Child
As you likely know, this website contains many articles discussing the strategy of hiring your children in yourbusiness.
The hire-your-child strategy works best for the Schedule C proprietorship. When a sole proprietor hires his orher child who is under age 18, the tax law generally exempts both the child and the proprietorship from Social Security and Medicare taxes. In addition, wages paid to a child under age 21 are exempt from federal employment tax.
That’s a great benefit for proprietorship owners with younger children.
But if you operate your business as a corporation, or your child is age 18 or older, then wages paid to your child are generally subject to payroll taxes.
This article explains a strategy that allows you to avoid payroll taxes in those situations.
A 2026 Tax Outcome
With proper implementation, you may be able to pay your child, say, $23,225 in annual income, and then
- deduct that $23,225 in your higher tax bracket,
- have your child taxed at a very low rate, and
- incur no payroll taxes for you or your child.
Example. Assume the following:
- You are in the 37 percent federal tax bracket.
- You pay your 20-year-old child $23,225 for a legitimate one-time project.
- Your child has no other income.
Your tax savings are $8,593 ($23,225 × 37 percent).
Your child’s tax:
- Standard deduction (2026): $16,100
- Taxable income: $23,225 – $16,100 = $7,125
- Tax (10 percent bracket2): $713
Net family benefit: $7,880 ($8,593 – $713).
In this example, this is the minimum family benefit. If you live in a state with an income tax, you realize a larger family benefit. If you are self-employed, you realize a larger family benefit because you reduce your self-employment taxes.
Net Earnings from Self-Employment
A technical point before we get to the nitty-gritty: The tax code defines “net earnings from self-employment” as income derived from a trade or business carried on by the individual. The Supreme Court has clarified that a trade or business requires
- continuity, and
- regularity.
A sporadic or one-time activity generally does not qualify as a trade or business.
Putting the Strategy in Play
To avoid both payroll taxes and self-employment taxes, structure the arrangement so your child or other family member performs a one-time, project-based service, such as
- building a website,
- creating videos or marketing materials,
- painting an office, or
- installing fixtures or equipment.
The key concept in the projects listed above is that they are not continuous or regular; they are one-time projects that are not a trade or business for the child or other family member. This ensures the projects are not subject to self-employment taxes.
Important: Worker Classification Still Matters
A one-time project does not automatically mean your child is an independent contractor.
The IRS determines worker status based on common-law factors, including the following:
- Behavioral control
- Financial control
- Relationship of the parties
Even a short-term or one-time worker can be an employee.
You must structure the arrangement carefully to support independent contractor treatment.
Expense Considerations for 2026
As a practical matter, it is often best for the business to purchase materials (such as paint, supplies, orequipment) directly and pay the family member a fixed price for the project. This keeps the arrangementsimple and avoids placing the burden of tracking and reporting expenses on the family member.
There is a trade-off to consider.
Having the business provide materials may slightly support employee classification, while having the family member purchase materials supports independent contractor status, which increases the risk that the activity rises to a trade or business subject to self-employment tax.
Because you want the family member to avoid both employee and independent contractor status, your business buying the materials is the cleaner and more defensible approach.
The Batok Case In Batok, the Tax Court ruled that a taxpayer’s one-time window installation job
- was not continuous or regular, and
- did not rise to the level of a trade or business.
Therefore, the income was not subject to self-employment taxes.
This case supports the idea that a true one-time project falls outside the self-employment tax.
Occasional Versus Ongoing Activity
IRS rulings illustrate how frequency can determine whether an activity rises to the level of a trade or business.In Revenue Ruling 55-431, the IRS concluded that an individual who accepts an occasional paid speaking engagement is not engaged in a trade or business and therefore is not subject to self-employment tax.
By contrast, in Revenue Ruling 77-356, the IRS ruled that a member of Congress who gave multiple paidspeeches (10 in one year) was engaged in the separate trade or business of speechmaking; therefore, that income was subject to self-employment taxes.
These rulings highlight the gray area between “occasional” and “ongoing” activity. The IRS evaluates factors such as frequency, continuity, and the individual’s availability to perform similar services, along with the amounts earned.
A true one-time project is your strongest position for your child or other family member avoiding treatment as a trade or business—and therefore avoiding self-employment taxes.
Final Thoughts
Students will be on summer break soon, making your student who needs, say, $20,000 or so for next year’s education a great candidate for a one-time project. Of course, your child is one candidate, but other family members are too.
This strategy can be powerful, but it is highly dependent on facts and proper execution.
Pay close attention to
- worker classification rules (you don’t want an employee),
- whether the activity rises to a trade or business (your child or other worker does not want to bein business), and
- properly documenting the project and payment.
Documentation
What Doesn’t Work
- Omitting a written description of theproject
- Using vague language such as “help around the office”
- Having the worker buy materials or track expenses
- Using time sheets and paying weekly or hourly (feels too much like wages)
- Failing to document that the project was completed
- Paying equal to or less than market value
What Works
- Providing a simple written description of the project: “Paint exterior of office building at [address]”
- Ensuring the description provides a clear scope and notes the one-time nature of the work
- Having the business purchase all materials
- Paying a single lump sum upon completion
- Including before-and-after photos or basic proof of the work completed
- Paying a reasonable amount for the project (what you would have to pay anyone else)
When done correctly, a one-time project can provide a tax-efficient way to help pay for your child’s college education or your mother’s European vacation.
Takeaways
A properly structured one-time project
- avoids putting your child or other family member on the payroll,
- allows your child or other family member to avoid self-employment taxes, and
- shifts income from your higher tax bracket to your child’s or other family member’s lower taxbracket.