Hiring your children and reimbursing owners through an accountable plan

Figures are for tax year 2026. This Guide covers United States federal tax only, for a business owner and their adviser. It covers two owner strategies: paying your own child a wage for real work in your business, and reimbursing owners and employees for business costs through an accountable plan. State payroll and income tax rules differ and are not covered. Payroll mechanics (deposits, Form 941, Form 940, Form W-2 filing) are in us-form-941-940-payroll. How much an S corporation owner must pay themselves (reasonable compensation) is in us-s-corp-election-decision. IRA and Roth IRA rules, including contribution limits, are in us-self-employed-retirement. Other 2026 law changes are in us-2026-federal-tax-changes. Renting your home to your own business is in us-augusta-rule-home-rental-to-your-business. Official sources were read on 3 October 2026. Worked examples use hypothetical amounts and are labelled as such.

The method, step by step

1. Identify the legal employer. Who pays the child is the business entity, not the parent personally: a sole proprietorship, a partnership, a single-member LLC that is disregarded, an LLC taxed as a partnership, or a corporation (C or S, including an LLC that elected to be taxed as one). The payroll tax result turns on this. See the IRS page Family employees and 26 C.F.R. 31.3121(b)(3)-1.
2. Confirm the child's age for each payment, and that the work is in the parent's trade or business. The social security and Medicare exemption ends when the child turns 18. The FUTA exemption ends at 21 (Publication 15 (2026), section 3).
3. Set a wage that is reasonable for work the child actually does. The deduction test is whether pay is reasonable and purely for services actually rendered (26 C.F.R. 1.162-7).
4. Run the child through payroll like any other employee: get the child's name and social security number, withhold income tax under the normal rules, and report the wages on Form W-2 (Publication 15 (2026), sections 3 and 4). Mechanics are in us-form-941-940-payroll.
5. Check the child's own income tax. A child who can be claimed as a dependent gets a limited standard deduction under 26 U.S.C. 63(c)(5), LII mirror of the U.S. Code, with the 2026 amounts in Rev. Proc. 2025-32. Wages are earned income, so the kiddie tax does not reach them (26 U.S.C. 1(g)(4), LII mirror of the U.S. Code).
6. For reimbursements, put a written accountable plan in place that meets all three tests of 26 C.F.R. 1.62-2: business connection, substantiation within a reasonable period, and return of any excess within a reasonable period.
7. Reimburse car use at no more than the business standard mileage rate for the date the miles were driven (Rev. Proc. 2019-46; Notice 2026-10; IRS standard mileage rates). Reimburse travel at no more than the federal per diem rate, or at actual cost with receipts (Rev. Proc. 2019-48).
8. Keep amounts paid under the plan off Form W-2. Anything paid outside the plan, or above the deemed-substantiated rate, goes through payroll as wages (26 C.F.R. 1.62-2, paragraphs (c)(4), (c)(5) and (h)).

Part A. Hiring your own child

Who gets the payroll tax exemption, and who does not

The exemption depends on WHO employs the child. It is not enough that the parent owns the business.

Source	all figures below	https://www.irs.gov/businesses/small-businesses-self-employed/family-help
Employer	Payroll tax treatment of the child's pay	Note (IRS wording)
Parent's sole proprietorship, or a partnership in which each partner is a parent of the child	Income tax withholding applies at any age. Social security and Medicare do not apply while the child is under age 18. FUTA does not apply while the child is under age 21.	"Payments for the services of a child under the age 18 are not subject to social security and Medicare taxes."
Same, child aged 21 or older	FUTA applies	"If the child is 21 years or older, then payments for the services of a child are subject to FUTA taxes."
A corporation (C or S), a partnership unless each partner is a parent of the child, or an estate	Income tax withholding, social security, Medicare and FUTA all apply, at any age	"subject to income tax withholding, social security taxes, Medicare taxes and FUTA taxes regardless of age"

Read the table as follows.

• The exemption for social security and Medicare covers a child under 18 only. From the date the child turns 18, the same business must withhold and pay social security and Medicare on that child's wages. It is lost for service performed from that date, not for the whole year retroactively, because the statute exempts "service performed by a child under the age of 18" and the regulation says the exception "continues only during the time that" the child is under the age limit. Which pay date carries wages for service in the birthday month is not settled by these pages; ask the accountant. (26 U.S.C. 3121(b)(3)(A), LII mirror of the U.S. Code).
• The regulation still prints the old age in paragraph (a)(3): "Services performed by a son or daughter under the age of 21 in the employ of his or her father or mother". The statute as amended, and Publication 15 (2026), say 18 for work in the parent's trade or business; the statute governs. Use the regulation for who the employer is (paragraphs (c) and (d)), not for the age.
• A corporation never qualifies. This includes an S corporation, a C corporation, and an LLC that elected to be taxed as either, even when the parent owns 100 percent of it. The regulation says "Services performed in the employ of a corporation are not within the exception" (26 C.F.R. 31.3121(b)(3)-1(d)), and Publication 15 lists a corporation "even if it is controlled by the child’s" parent among the employers whose wages to a child are taxable (Publication 15 (2026), section 3, Covered services of a child or spouse).
• A partnership qualifies only if EVERY partner is a parent of the child. A partnership of the two parents qualifies. A partnership of a parent and a grandparent, a sibling, or an unrelated partner does not (26 C.F.R. 31.3121(b)(3)-1(c)).
• A single-member LLC that is disregarded for income tax is treated as a corporation for employment taxes (26 C.F.R. 301.7701-2(c)(2)(iv)(B)). For this family exemption only, the regulation looks through it: the owner is treated as the employer, so a child under 18 working for a parent's disregarded single-member LLC can qualify if the other requirements are met (26 C.F.R. 31.3121(b)(3)-1(d)). This look-through applies to wages paid on or after 1 November 2011.
• The exemption is from payroll taxes only. Income tax withholding rules still apply to the child's wages at any age. A child who had no income tax liability last year and expects none this year may claim exemption from withholding on Form W-4; Publication 15 says the wages "are still subject to social security and Medicare taxes" where those apply (Publication 15 (2026), section 9, Exemption from federal income tax withholding).
• Domestic work in the parent's private home (not in a trade or business) follows a different rule: social security and Medicare do not apply until the child reaches age 21. This Guide covers work in the business; refer household employment questions.

Social security and Medicare rates that the exemption saves

Source	all figures below	https://www.irs.gov/pub/irs-pdf/p15.pdf
Item	Rate for 2026	Note
Social security tax, employer share and the same again for the employee	6.2%	"For 2026, the social security tax rate is 6.2%"
Medicare tax, employer share and the same again for the employee	1.45%	"The Medicare tax rate is 1.45% each for the employee"

Both shares apply in the corporate case. In the exempt case neither applies. FUTA is a separate employer-only tax; its rate and wage base are in us-form-941-940-payroll.

The child's own income tax: the dependent standard deduction

A child who can be claimed as a dependent on a parent's return does not get the full standard deduction automatically. The child's basic standard deduction is capped at the GREATER of a fixed amount or the child's earned income plus a fixed add-on (26 U.S.C. 63(c)(5), LII mirror of the U.S. Code). It can never exceed the ordinary single standard deduction, because section 63(c)(5) only limits the basic standard deduction; it does not raise it.

Source	all figures below	https://www.irs.gov/pub/irs-drop/rp-25-32.pdf
Item (tax year 2026)	Amount	Note
Standard deduction, unmarried individual (the ceiling for a dependent child)	USD 16,100	"Unmarried Individuals (other than Surviving Spouses and Heads of $16,100"
Dependent's standard deduction: fixed minimum	USD 1,350	"cannot exceed the greater of (1) $1,350, or (2) the sum of $450 and the individual's earned income"
Dependent's standard deduction: add-on to earned income	USD 450	same sentence

What follows for a child whose only income is wages (and who is not blind):

• The child's standard deduction is the lesser of USD 16,100 and the greater of USD 1,350 or wages plus USD 450.
• So wages up to USD 16,100 bear no federal income tax. Wages above it are taxed on the excess.
• If the child also has interest, dividends or other unearned income, the deduction is still built from earned income only, and the unearned income may fall under the kiddie tax. Work the full return.

The kiddie tax does not apply to wages

The kiddie tax taxes a child's "net unearned income" at the parent's rate. The statute defines it as the part of adjusted gross income "which is not attributable to earned income" (26 U.S.C. 1(g)(4)(A), LII mirror of the U.S. Code). Wages for work actually done are earned income, so they are outside the kiddie tax whatever the child's age. The IRS topic page covers only investment and other unearned income (Topic no. 553). The dollar thresholds for unearned income are not repeated here.

Reasonable pay for real work

The business deducts the child's wages only as "a reasonable allowance for salaries or other compensation for personal services actually rendered". The test is "whether they are reasonable and are in fact payments purely for services" (26 C.F.R. 1.162-7). The regulation's yardstick is what "would ordinarily be paid for like services by like enterprises under like circumstances".

• The work must be real and done by the child: tasks the child can actually do at that age, for the business, not household chores.
• The pay rate should match what the business would pay an unrelated person of similar ability for the same tasks.
• Keep records made at the time: timesheets or a log of hours, a list of duties, pay stubs, and payment into an account in the child's name. These are how the business shows the services were "actually rendered". Pay above the reasonable amount is not deductible as wages.
• Pay through payroll and issue Form W-2. Publication 15 requires the employer to get "each employee’s name and SSN and to enter them on Form W-2" (Publication 15 (2026), section 4).

Roth IRA for the child

A child with earned income can contribute to an IRA or Roth IRA, limited by that income and the annual limit. Use us-self-employed-retirement for the limits and rules. This Guide does not repeat them.

Worked example A: same child, two employers (hypothetical)

A 15-year-old works weekends in a parent's business, keeps a timesheet, and is paid a reasonable USD 12,000 for 2026 through payroll (hypothetical). The child has no other income and is claimed as a dependent by the parent.

Payroll taxes:

Source	all figures below	https://www.irs.gov/pub/irs-pdf/p15.pdf
Step	Amount	Note
Child's wages (hypothetical)	USD 12,000	reasonable pay, real work
Case 1, parent's sole proprietorship: social security and Medicare, each side	none	child under 18, sole proprietorship
Case 2, parent's S corporation: social security withheld from the child	USD 744	USD 12,000 times 6.2%
Case 2: Medicare withheld from the child	USD 174	USD 12,000 times 1.45%
Case 2: total withheld from the child	USD 918	USD 744 plus USD 174
Case 2: employer pays the same again	USD 918	employer share at the same rates
Case 2: total social security and Medicare on these wages	USD 1,836	USD 918 times 2

In Case 2 FUTA also applies. In Case 1 FUTA does not apply because the child is under 21.

Child's income tax (same in both cases):

Source	all figures below	https://www.irs.gov/pub/irs-drop/rp-25-32.pdf
Step	Amount	Note
Wages plus the add-on	USD 12,450	USD 12,000 plus USD 450; greater than USD 1,350
Child's standard deduction	USD 12,450	lesser of USD 12,450 and USD 16,100
Child's taxable income	none	wages are below the deduction
Boundary: wages of USD 17,000 instead (hypothetical)	USD 900	taxable: deduction capped at USD 16,100, so USD 17,000 minus USD 16,100

The business deducts the wages (and in Case 2 the employer's share of payroll tax) if the pay is reasonable for the work. In Case 1 the deduction also reduces the parent's self-employment income.

Part B. Accountable plans for reimbursing owners and employees

What an accountable plan does

Amounts paid under an accountable plan "are excluded from the employee's gross income, are not reported as wages or other compensation on the employee's Form W-2, and are exempt from the withholding and payment of employment taxes" (26 C.F.R. 1.62-2(c)(4)). The business still deducts the cost as its own business expense.

The plan covers expenses that an EMPLOYEE pays "in connection with the performance of services as an employee of the employer" (26 C.F.R. 1.62-2(d)(1)). "Generally, an officer of a corporation is an employee of the corporation" (26 C.F.R. 31.3121(d)-1(b)); an officer who performs no services or only minor services and receives no pay is not. So an S corporation shareholder who works in the business as an officer and is on payroll can be reimbursed under the corporation's plan. This Guide covers reimbursement of employees only. A sole proprietor's own business costs and a partner's costs are outside it (refer).

The three requirements (all three, not any one)

Source	all figures below	https://www.ecfr.gov/current/title-26/section-1.62-2
Requirement	What it means	Note (regulation wording)
1. Business connection, paragraph (d)	Pays only for business expenses the employee pays or incurs in performing services as an employee, that would be deductible. Payment made regardless of whether the employee has expenses fails.	"If a payor arranges to pay an amount to an employee regardless of whether the employee incurs"
2. Substantiation, paragraph (e)	Each expense is substantiated to the payor within a reasonable period. For travel, car use and other section 274(d) items: amount, time, place or use, and business purpose.	"requires each business expense to be substantiated to the payor"
3. Return of excess, paragraph (f)	The employee must return within a reasonable period any amount paid beyond substantiated expenses.	"requires the employee to return to the payor within a reasonable period of time"
Reasonable period, safe harbor (fixed date method), paragraph (g)(2)(i)	Advance paid within 30 days of the expense; expense substantiated within 60 days after it is paid or incurred; excess returned within 120 days after the expense	"An advance made within 30 days of when an expense is paid or incurred"
Reasonable period, safe harbor (periodic statement method), paragraph (g)(2)(ii)	At least quarterly statements asking the employee to substantiate or return the excess; amounts substantiated or returned within 120 days of the statement count as timely	"no less frequently than quarterly"

Outside the safe harbors, the reasonable period "will depend on the facts and circumstances" (paragraph (g)(1)).

Two more rules in the same regulation catch owners:

• If wages and a reimbursement are paid in one payment, the reimbursement must be paid separately or identified separately (paragraph (d)(1)).
• A pattern of abuse turns every payment under the arrangement into a nonaccountable payment (paragraph (k)).

What happens if the plan fails

• If any of the three requirements is not met, everything paid under the arrangement is treated as paid under a nonaccountable plan: it is wages, goes on Form W-2, and is subject to income tax withholding, social security, Medicare and FUTA (paragraphs (c)(3) and (c)(5)).
• The employee cannot fix this afterwards. Under a nonaccountable plan, an employee "cannot compel the payor to treat the payments as paid under an accountable plan by voluntarily substantiating the expenses and returning any excess" (paragraph (c)(3)(i)).
• If the plan meets all three requirements but an employee keeps an excess beyond a reasonable period, only the excess becomes wages. The substantiated part stays under the accountable plan (paragraph (c)(2)(ii)).
• The employee will not get a deduction to make up for it. Miscellaneous itemized deductions, which is where unreimbursed employee business expenses sat, have been suspended since tax year 2018 and the suspension now has no end date: the One Big Beautiful Bill Act section 70110 struck the words "and before January 1, 2026" from section 67(g) (Public Law 119-21). Educator expenses are the exception that section adds back. For an S corporation shareholder-employee, an expense the corporation does not reimburse under a plan is generally lost.

The common owner use: S corporation shareholder-employee

The usual items are business miles in the owner's own car, travel away from home, and business costs paid on a personal card. Home office costs are the item most often argued about:

• An employee's home office counts only if, among the other section 280A(c)(1) conditions, the exclusive use is "for the convenience of his employer" (26 U.S.C. 280A(c)(1), LII mirror of the U.S. Code).
• If that test is not met, the cost is not a business expense of the employee, so it fails the business connection test and a reimbursement of it is wages.
• How to allocate home costs for a reimbursement is not settled by the pages above. Refer the computation to the accountant.

Car use: the two 2026 business mileage rates

A mileage allowance paid in place of actual car costs is deemed substantiated up to "the business standard mileage rate multiplied by the number of substantiated business miles", if the employee substantiates the time, place (or use) and business purpose of each trip (Rev. Proc. 2019-46, sections 7.01 and 7.02). Any amount above the rate for substantiated miles "is treated as paid under a nonaccountable plan and is subject to withholding and payment of employment taxes" (section 8.01). There are two rates in 2026, so split miles by the date driven.

Source	all figures below	https://www.irs.gov/pub/irs-drop/n-26-10.pdf
Period	Business rate	Note
1 January to 30 June 2026	72.5 cents per mile	"The standard mileage rate for transportation or travel expenses for 2026 is 72.5 cents per mile" (period from the IRS standard mileage rates table)

Source	all figures below	https://www.irs.gov/tax-professionals/standard-mileage-rates
Period	Business rate	Note
1 July to 31 December 2026	76 cents per mile	"Self-employed and business: 76 cents/mile"

A fixed and variable rate (FAVR) allowance is a different method. It cannot be given to a "control employee" as defined in 26 C.F.R. 1.61-21(f)(5) and (6) (check whether the owner is one), and it needs at least five covered employees (Rev. Proc. 2019-46, section 6.05). A flat monthly car allowance paid whether or not business miles are driven fails the business connection test and is wages.

Travel: per diem, and the trap for owners of more than 10 percent

• A per diem allowance for lodging, meals and incidental expenses is deemed substantiated up to "the federal per diem rate" for the locality and day, if the employee substantiates time, place and business purpose (Rev. Proc. 2019-48, sections 4.01 and 7.01). The federal rates are published by the General Services Administration and are not reproduced here.
• The full per diem method (section 4.01) and the high-low method (section 5) "do not apply if a payor and an employee are related within the meaning of § 267(b)", with the ownership test set at "10 percent" (section 6.07). An S corporation shareholder-employee who owns, directly or through family attribution under section 267(c), more than 10 percent in value of the stock is therefore reimbursed for lodging at actual cost with receipts. A child or parent of such an owner who is on the payroll is related in the same way (26 U.S.C. 267, LII mirror of the U.S. Code).
• Section 6.07 names only sections 4.01 and 5. It does not name the meals and incidental expenses only per diem (section 4.02), which requires that "the payor pays the employee for actual expenses for lodging based on receipts submitted to the payor". The revenue procedure does not say in words that section 4.02 is open to a related employee; treat it as available only on the accountant's confirmation.

Worked example B: mileage reimbursement by an S corporation (hypothetical)

An S corporation's shareholder-employee drives a personal car 1,000 business miles in March 2026 and 1,000 business miles in September 2026, logs each trip (date, destination, business purpose, miles) and submits the log within 60 days after each trip (hypothetical). The corporation reimburses at the standard rates.

Source	all figures below	https://www.irs.gov/pub/irs-drop/n-26-10.pdf
Step	Amount	Note
March miles at 72.5 cents (hypothetical miles)	USD 725	1,000 times 72.5 cents

Source	all figures below	https://www.irs.gov/tax-professionals/standard-mileage-rates
Step	Amount	Note
September miles at 76 cents (hypothetical miles)	USD 760	1,000 times 76 cents
Total reimbursed under the accountable plan	USD 1,485	USD 725 plus USD 760; not on Form W-2

If the corporation had paid all 2,000 miles at the March rate, the September miles would be under-reimbursed; the owner cannot deduct the shortfall. If it had paid all 2,000 miles at 76 cents, the excess on the March miles would be wages. If no log is kept, the whole allowance is wages.

Ask the client first

• What legal entity employs the child, and how is it taxed: sole proprietorship, disregarded single-member LLC, partnership (who are ALL the partners?), or a corporation including an LLC taxed as an S or C corporation?
• What is the child's date of birth, and when in 2026 does the child turn 18 or 21?
• What work does the child actually do, how many hours, at what rate, and what would the business pay someone unrelated for the same work? Are there timesheets?
• Does the child have any other income, especially interest, dividends or capital gains, and who claims the child as a dependent?
• For reimbursements: is the person reimbursed on payroll as an employee, is there a written plan, and are expenses logged and submitted within 60 days with any excess returned within 120 days?
• For travel and home office: what percentage of the corporation does the person own, and is the home office for the employer's convenience?

When to refuse or refer

• Refuse to treat wages paid by a corporation (C or S, including an LLC taxed as one) to an owner's child as exempt from social security, Medicare or FUTA. The exemption does not exist for corporate employers.
• Refuse to treat a partnership with any partner who is not a parent of the child as qualifying.
• Refuse to set a child's wage by reference to the standard deduction alone. The wage must be reasonable for work actually done; the deduction only tells you how much of a reasonable wage is free of income tax.
• Refuse to backfill a reimbursement plan after the year, or to call a flat allowance an accountable plan.
• Refer: household or domestic work by a child, a child with a disability needing adult care, a child aged 18 or over in a parent's business, parents in a partnership with others, a child who also has significant unearned income, state payroll and unemployment rules, and allocation of home office costs.
• Refer partner (not employee) reimbursements and any question about a partnership's own reimbursement policy.
• Refer payroll filing and deposits to us-form-941-940-payroll, owner salary levels to us-s-corp-election-decision, and the child's IRA to us-self-employed-retirement.

Sources

• IRS, Family employees: https://www.irs.gov/businesses/small-businesses-self-employed/family-help
• IRS, Publication 15 (2026), Employer's Tax Guide: https://www.irs.gov/pub/irs-pdf/p15.pdf
• 26 U.S.C. 3121, LII mirror of the U.S. Code: https://www.law.cornell.edu/uscode/text/26/3121
• 26 C.F.R. 31.3121(b)(3)-1, Family employment: https://www.ecfr.gov/current/title-26/section-31.3121%28b%29%283%29-1
• 26 C.F.R. 301.7701-2, Business entities: https://www.ecfr.gov/current/title-26/section-301.7701-2
• 26 C.F.R. 31.3121(d)-1, Who are employees: https://www.ecfr.gov/current/title-26/section-31.3121%28d%29-1
• 26 C.F.R. 1.162-7, Compensation for personal services: https://www.ecfr.gov/current/title-26/section-1.162-7
• 26 U.S.C. 63, LII mirror of the U.S. Code: https://www.law.cornell.edu/uscode/text/26/63
• 26 U.S.C. 1, LII mirror of the U.S. Code: https://www.law.cornell.edu/uscode/text/26/1
• IRS, Rev. Proc. 2025-32 (2026 inflation adjustments): https://www.irs.gov/pub/irs-drop/rp-25-32.pdf
• IRS, Topic no. 553 (kiddie tax): https://www.irs.gov/taxtopics/tc553
• 26 C.F.R. 1.62-2, Reimbursements and other expense allowance arrangements: https://www.ecfr.gov/current/title-26/section-1.62-2
• 26 U.S.C. 280A, LII mirror of the U.S. Code: https://www.law.cornell.edu/uscode/text/26/280A
• Public Law 119-21 (One Big Beautiful Bill Act), section 70110: https://www.govinfo.gov/content/pkg/PLAW-119publ21/html/PLAW-119publ21.htm
• IRS, Rev. Proc. 2019-46 (mileage allowances): https://www.irs.gov/pub/irs-drop/rp-19-46.pdf
• IRS, Notice 2026-10 (2026 standard mileage rates): https://www.irs.gov/pub/irs-drop/n-26-10.pdf
• IRS, Standard mileage rates: https://www.irs.gov/tax-professionals/standard-mileage-rates
• IRS, Rev. Proc. 2019-48 (per diem): https://www.irs.gov/pub/irs-drop/rp-19-48.pdf
• 26 U.S.C. 267, LII mirror of the U.S. Code: https://www.law.cornell.edu/uscode/text/26/267