Hire Your Kids for a Rental: $15,650 Tax-Free and a Roth IRA

The 2026 numbers on one screen

The page assumes a child who is a dependent of the parent and has only wages. Each row is from a saved primary document; the arithmetic columns are ours.

A date to keep: Publication 527 says you “generally deduct your rental expenses in the year you pay them,” so for a 2026 deduction the wages have to be paid by December 31, 2026.

The rental question: what the documents say

A common version of this advice (the payroll-tax exemption needs a trade or business, and passive rental often is not one) mixes two different tests. The text of the Internal Revenue Code has two paragraphs:

• 3121(b)(3)(A): “service performed by a child under the age of 18 in the employ of his father or mother.” Nothing in that paragraph asks whether the parent has a trade or business.
• 3121(b)(3)(B): “service not in the course of the employer’s trade or business, or domestic service in a private home of the employer, performed by an individual under the age of 21 in the employ of his father or mother.” This is where the trade-or-business question lives, and it extends the exception to 21 for work outside a business.

Publication 15 states both in plain terms: pay to a child under 18 working for a parent in a trade or business is exempt when the business is “a sole proprietorship or a partnership in which each partner is a parent of the child,” and work other than in a trade or business is exempt “until the child reaches age 21.” Read together (our reading), the age of the child decides the payroll tax and the character of the rental decides only the 18-to-20 window.

Whether a given rental is a trade or business for employment-tax purposes is not answered by the documents we saved. Revenue Procedure 2019-38 gives a rental safe harbor, but it says it “applies solely for purposes of section 199A” (the qualified business income deduction), so it does not settle the question for payroll. Publication 527 sends a landlord to Schedule E unless substantial services are provided, and says rental real estate income “generally isn’t included in net earnings from self-employment.” For an 18-year-old the number at stake is real, which is why the table shows both columns (our arithmetic below).

Who the employer is

The family exception is tied to the employer’s legal form. The regulation and Publication 15 say:

The last row is the reader this site usually writes for. Holding units in a sponsor’s fund gives you a K-1 or a 1099-DIV, not a payroll. The idea works only on property or a business you operate. Our LLC for rental property guide covers the entity choice, and our rental income tax guide covers Schedule E.

Worked cases (our arithmetic)

Assumptions, all ours: the child is under 18 for all of 2026, is a dependent, has only wages, and works for a parent who owns the rental directly. The parents file jointly with a rental that has at least the wage in net income, so the deduction is used. The child’s tax uses the 2026 single brackets and the dependent standard deduction. No other income, no state tax, no payroll tax (the child is under 18).

How the rows are built: the child’s standard deduction is $450 plus wages, capped at $16,100 (Rev. Proc. 2025-32, section 4.14(2)). Tax on $13,900 is $1,240 plus 12% of the $1,500 above $12,400, or $1,420 (section 4.01). The parents’ 24% bracket for a joint return runs from $211,400 to $403,550 of taxable income in 2026, and 32% to $512,450 (section 4.01). Three readings:

1. The sweet spot is $15,650. Above it each extra dollar is taxed to the child at 10% and deducted by the parents at 24% or 32%, so the family still gains, but the child’s own tax starts.
2. Net investment income tax adds to the parents’ side. Publication 527 says net investment income may include rental income and other income from passive activities, and the statute reduces net investment income by “deductions allowed by this subtitle which are properly allocable” to it (26 U.S.C. 1411(c)(1)(B)). If the parents pay the 3.8% on this rental, the $15,650 wage saves a further $595, a combined 27.8% (24% plus 3.8%) of $15,650, which is $4,351 (our arithmetic; Form 8960 decides).
3. Age 18 changes the sign. For a child of 18 working in a rental that counts as the parent’s trade or business, FICA on $15,650 is 7.65% from the employee ($1,197) and 7.65% from the employer ($1,197), $2,394 in total (our arithmetic). The employer share is itself a deductible expense, but the family has paid payroll tax it would not have paid under 18, or at 18 to 20 for work outside a business.

What the deduction needs to survive

Section 162(a)(1) allows “a reasonable allowance for salaries or other compensation for personal services actually rendered.” Section 62(a)(4) puts deductions “attributable to property held for the production of rents or royalties” above the line, so wages for rental work are a Schedule E expense rather than an itemized one. Publication 527’s list of common rental expenses names cleaning and maintenance, management fees and repairs, not wages, so the practical basis is the statute rather than an IRS example (our reading).

What that means in practice (our reading of the statute and of Publication 501):

• The work has to happen and be documented. Cleaning units between tenants, yard work, painting, paperwork and photographing a turnover are services. Pay for work the child did not do is a gift, and a gift is not a deduction.
• The rate has to be what you would pay a stranger. The sources we saved give no rate table; the statute’s word is “reasonable.”
• The child’s earnings are the child’s. Publication 501: “Amounts a child earns by performing services are included in the child’s gross income and not the gross income of the parent.” If the child owes tax and does not pay it, the parent is liable.
• The passive loss rules sit on top. Publication 527 says rental real estate income is “generally subject to the passive activity limits.” A property with a net loss before the wage gains little from the extra deduction this year (our reading). Our passive loss guide has the $25,000 allowance and its phase-out.

Does the child stay a dependent? A qualifying child must be under 19 at the end of the year (or under 24 and a student), must have lived with the parent for more than half of the year, and “must not have provided more than half of the child’s own support for the year” (Publication 501). Publication 501 also says a person with gross income of $5,200 or more “usually can’t be claimed as a dependent unless you are a qualifying child” (2025 figure), so the gross income test is for other relatives. Whether a child who earns $15,650 and spends it on their own keep passes the support test is a question for the return, not for this page.

The Roth IRA: wages are what open the door

Publication 590-A says you can contribute to a Roth IRA “if you have taxable compensation” and that the limit is “the lesser of” the annual maximum or the compensation. For 2026 the maximum is $7,500. Contributions “can be made to your Roth IRA regardless of your age,” and Form W-2 box 1 pay counts as compensation. Two limits apply to this plan:

Our arithmetic from the Publication 590-A rule. The left-over column is wages minus the contribution, before any income tax.

Two traps. First, rental income is not compensation: Table 1-1 of Publication 590-A lists “earnings and profits from property, such as rental income, interest income, and dividend income” as not compensation. That is why the parent’s own rental cash cannot open a Roth for the parent and why the child’s W-2 can open one for the child. Second, an excess contribution has a 6% excise tax for every year it stays in the account (Publication 590-A). The limit is tied to the child’s compensation, not to whose cash funds the account; the publication does not say whether the parent may supply the money, so we do not claim an answer on that point (our reading of the text).

The deadline for 2026 is the due date of the return (not including extensions), April 15, 2027 for most people (our reading of Publication 590-A). Income limits are not an issue for a child with a few thousand dollars of income; our Roth IRA contribution limits guide has the ranges for the parents’ own IRAs.

What the paperwork asks of you

• Employer identification and Form W-4. A child on payroll is an employee. Publication 15 says a child’s pay is “generally subject to income tax withholding” unless it is domestic work in the parent’s home or work outside a trade or business of under $50 a quarter; an employee who “had no income tax liability last year and expect none this year” can claim exemption on Form W-4, and it must be renewed each year by February 15.
• Form W-2, and the quarterly or annual payroll return. Wages are reported on Form W-2 (Publication 15). Which return applies depends on whether any tax is withheld or owed.
• Pay by a traceable method. The sources do not require it; the deduction is the taxpayer’s to prove.
• Do not use a 1099 to avoid the question. Publication 334 says a person “under age 18 working for your father or mother” is not subject to self-employment tax, which is the child’s own tax if the child were an independent contractor. That is not a reason to pay a child as a contractor; the family exceptions in Publication 15 are written for employees.
• State law. Child labor, minimum wage and unemployment rules are outside the federal sources used here.

What a reader can do with this

• Decide who the employer is first. Sole owner, a married couple’s partnership or a single-member LLC can fit the family exception; a corporation or an LLC with an outside investor cannot.
• Write down the child’s age on each payment date. The break is at 18 (payroll tax) and at 21 (FUTA and the non-business exception).
• Size the wage to the deduction. $15,650 is the 2026 level at which the child’s tax is zero. Above it the family still saves, but the child pays tax.
• Check that the rental has net income to absorb the wage. On a property with a loss, ask whether the passive loss rules suspend the benefit.
• Plan the Roth separately. The wage opens the door; the contribution is a second step with its own 2026 deadline.
• Watch for the 2027 numbers. The 2027 inflation adjustments had not been published as of October 28, 2026; the standard deduction and the IRA limit can both move.

Paying a child from a rental property combines four rules (payroll tax by the child’s age and the employer’s legal form, the child’s own return, the parents’ passive loss limits and the Roth IRA), and the right set-up depends on the family’s facts, which is what a CPA can look at.

FAQ

Sources, read and saved on October 28, 2026: Rev. Proc. 2025-32 (sections 4.01, 4.02 and 4.14), Rev. Proc. 2019-38, Publication 15 (2026), Publication 501 (2025), Publication 527 (2025), Publication 334 (2025), Publication 590-A (2025), irs.gov; 26 U.S.C. 62, 162, 1411, 3121 and 3306 and 26 CFR 31.3121(b)(3)-1 (Legal Information Institute). The worked cases and readings are our arithmetic with the assumptions stated. See also our guides to net investment income tax on real estate and Trump accounts. This is analysis of public documents, not investment, legal or tax advice.