Instead | Higher standard deduction boosts Hiring kids savings

Enhanced standard deduction transforms family business tax strategies

The One Big Beautiful Bill Act creates unprecedented tax savings opportunities for family businesses that employ their children. By permanently increasing the standard deduction to $15,750 for single filers and adding a temporary $1,000 enhancement through 2028, the legislation allows each child working in your family business to earn up to $16,750 completely tax-free in 2026.

This enhanced Hiring kids strategy delivers substantial benefits for both the business and the child. Parents can deduct reasonable wages as a business expense, while children pay no federal income tax on earnings up to the enhanced standard deduction. When combined with payroll tax exemptions available to sole proprietorships and spousal partnerships, families can save thousands of dollars annually.

The timing of these changes makes 2026 an ideal year to implement or expand your family employment strategy. Understanding how the enhanced standard deduction interacts with existing payroll tax exemptions helps you maximize total tax savings while building your child's financial literacy and work ethic.

Understanding the 2026 standard deduction enhancement under the One Big Beautiful Bill Act

The One Big Beautiful Bill Act establishes a permanent increase in the standard deduction that exceeds the TCJA levels. Section 70102 of the legislation establishes a two-tiered benefit structure that significantly increases the amount of earnings children can earn tax-free.

Permanent standard deduction increases, effective 2025, include:

• Single filers receive a $15,750 base deduction with annual inflation adjustments
• Married couples filing jointly receive $31,500 base deduction
• Head of household filers receive $23,625 base deduction
• All amounts adjust for inflation beginning in 2026

The temporary enhancement provides additional benefits for tax years 2025 through 2028. Single filers receive an extra $1,000 annually, bringing the total 2026 standard deduction to approximately $16,750 before additional inflation adjustments. This means children employed by family businesses can earn significantly more income without owing any federal income tax.

For individuals operating family businesses, this enhancement directly increases the tax-free threshold for each employed child. A family with three children who work in their business, using the Hiring kids strategy, could shelter over $50,000 in combined wages from federal income tax.

Calculating your family's total tax savings potential

The One Big Beautiful Bill Act's enhanced standard deduction amplifies the already substantial benefits of the Hiring kids strategy. Understanding the complete savings calculation helps you appreciate the full financial impact of employing your children.

Example calculation for sole proprietorship with one child in 2026:

1. Child's annual wages paid: $16,750
2. Federal income tax owed by child: $0 (wages equal standard deduction)
3. Business deduction for wages: $16,750
4. Parents' marginal tax rate: 32%
5. Federal income tax savings for parent: $16,750 × 32% = $5,360
6. Social Security tax savings (employer): $16,750 × 6.2% = $1,038.50
7. Medicare tax savings (employer): $16,750 × 1.45% = $242.88
8. FUTA tax savings: $7,000 × 0.6% = $42
9. Total family tax savings: $6,683.38

These calculations demonstrate how the enhanced standard deduction can increase potential savings. Under the previous law with a $14,600 standard deduction, the same family would have saved approximately $5,752 per child annually, representing over $900 in tax benefits.

Payroll tax exemptions multiply standard deduction benefits

The Hiring kids strategy delivers maximum value when combined with payroll tax exemptions available to specific business structures. These exemptions work alongside the enhanced standard deduction to create layered tax advantages unavailable through other employment arrangements.

Qualifying business structures for payroll tax exemptions include:

• Sole proprietorships filing Schedule C
• Farm businesses filing Schedule F
• Spousal partnerships where both spouses actively participate
• Single-member LLCs are treated as disregarded entities

Children under 18 employed by these business types are exempt from Social Security and Medicare taxes on their wages. Children under 21 are additionally exempt from Federal Unemployment Tax (FUTA). These exemptions save families an additional 7.65% in combined Social Security and Medicare taxes that would otherwise apply to employment wages.

S Corporations and C Corporations do not qualify for the payroll tax exemption, though the enhanced standard deduction benefits still apply to children employed by these entities. Families operating corporate structures may want to evaluate whether restructuring could provide additional tax advantages.

Age requirements and eligible relationships under current law

The One Big Beautiful Bill Act maintains existing eligibility requirements while enhancing the financial benefits available to qualifying families. Understanding these requirements ensures your family employment arrangement remains compliant with IRS regulations.

Children eligible for payroll tax exemptions must meet specific criteria:

• The child must be under 18 for Social Security and Medicare exemption
• Child must be under 21 for FUTA exemption
• Eligible relationships include son, daughter, stepchild, or foster child
• Adopted children qualify for the same benefits as biological children
• Grandchildren do not qualify for payroll tax exemptions

The enhanced standard deduction benefits apply regardless of the child's age, provided they can be claimed as a dependent or file their own return claiming the standard deduction. Children 18 and older still benefit from the $16,750 tax-free earnings threshold, though payroll taxes would apply to their wages.

Hiring kids in your business requires paying reasonable wages for the legitimate work they perform. The IRS scrutinizes family employment arrangements, making proper documentation essential for maintaining these valuable tax benefits.

Documentation requirements protect your tax savings

Proper documentation transforms the Hiring kids strategy from a potential audit risk into a defensible tax position. The enhanced savings available under the One Big Beautiful Bill Act make thorough record-keeping even more critical for family businesses.

Essential documentation for employing children includes:

• Written job descriptions outlining duties and responsibilities
• Time tracking records showing hours worked and dates
• Payroll records demonstrating wages paid at reasonable rates
• W-4 forms completed by each employed child
• Bank account deposits matching payroll amounts

Reasonable compensation requires paying wages comparable to what you would pay an unrelated employee for similar work. Document your methodology for setting compensation levels based on local wage rates.

Age-appropriate work opportunities maximize benefits

Creating meaningful work opportunities for children at various ages requires creativity while maintaining compliance with child labor laws and IRS requirements. The Hiring kids strategy, combined with the enhanced standard deduction, makes investing time in proper job design worthwhile.

Younger children ages 7 to 13 can perform tasks such as:

• Cleaning and organizing office or work spaces
• Shredding documents and filing papers
• Modeling for product photography or marketing materials
• Stuffing envelopes and preparing mailings
• Basic data entry under supervision

Teenagers ages 14 to 17 can handle more complex responsibilities. These older children often manage social media accounts, assist with customer service, perform bookkeeping tasks, and handle inventory. The enhanced standard deduction allows them to earn substantial wages while building valuable work experience.

Children 18 and older can perform virtually any business function, though they no longer qualify for payroll tax exemptions. The $16,750 standard deduction under the One Big Beautiful Bill Act still allows these young adults to earn significant income tax-free while developing professional skills.

Coordinating with other business deductions amplifies savings

The Hiring kids strategy works synergistically with other business deductions available under the One Big Beautiful Bill Act. Strategic coordination across multiple tax strategies maximizes your total family tax savings.

Consider combining Hiring kids with Meals deductions for legitimate business meals involving your employed children. Training meetings, client entertainment where children assist, and business travel meals all qualify for enhanced deductibility under the new legislation.

Travel expenses may include costs for children traveling for legitimate business purposes. Trade shows where children assist with booth setup, client visits where they provide support, and training conferences all create additional deductible expenses.

The Qualified education assistance program (QEAP) allows businesses to provide tax-free educational assistance up to $5,250 annually per employee, including employed children. This benefit, in addition to wages, provides children with over $22,000 in combined tax-free compensation.

Building children's retirement savings with earned income

Children with earned income from the Hiring kids strategy gain access to powerful retirement savings vehicles. The One Big Beautiful Bill Act's enhanced standard deduction increases the amount children can contribute to retirement accounts while still allowing them to earn tax-free income.

Children can contribute to a Traditional 401k if your business offers one, or you can establish individual retirement accounts for each employed child. Roth IRA contributions are compelling for young workers, allowing decades of tax-free growth.

A child contributing $6,000 annually starting at age 14 could accumulate over $1.5 million by age 65, assuming 8% average annual returns. The enhanced standard deduction under the One Big Beautiful Bill Act makes these contributions more achievable.

State tax considerations and planning opportunities

While the One Big Beautiful Bill Act addresses federal taxation, state tax implications require separate consideration. Many states conform to federal standard deduction amounts, potentially extending the enhanced benefits to state income taxes.

States with no income tax provide maximum Hiring kids benefits. Families in Texas, Florida, Nevada, Washington, Wyoming, Alaska, Tennessee, and South Dakota retain 100% of wage deductions, with no state income tax offsets.

Review your 2026 State tax deadlines and conformity rules to understand how the enhanced federal standard deduction affects your family's state tax obligations.

Common mistakes to avoid with family employment

The enhanced tax benefits under the One Big Beautiful Bill Act make the proper implementation of Hiring kids even more critical. Avoiding common mistakes protects your deductions while maintaining family harmony.

Frequent errors that trigger IRS scrutiny include:

• Paying wages without corresponding work performed
• Setting compensation above reasonable market rates
• Failing to withhold and remit payroll taxes when required
• Not issuing W-2 forms to employed children
• Paying wages in cash without proper documentation
• Employing children too young to perform assigned tasks

Mixing personal and business purposes creates additional risk. Children attending business trips must perform legitimate work to justify deducting their travel costs. Birthday parties cannot be recharacterized as business events simply because the children are employed.

Maintain separate bank accounts for business transactions and pay children through regular payroll processes. This documentation trail supports your deductions if the IRS questions your family employment arrangement.

Planning for maximum 2026 benefits

Implementing the Hiring kids strategy before 2026 allows families to establish documentation systems and refine compensation structures. Early planning maximizes your ability to capture full benefits when they become available.

Preparation steps for maximizing 2026 benefits:

• Review your business structure for payroll tax exemption eligibility
• Identify age-appropriate work opportunities for each child
• Establish time tracking and documentation systems
• Set up payroll processing, including W-4 completion
• Consider Roth IRA establishment for children with earned income

The temporary $1,000 increase to the standard deduction expires after 2028. Families should maximize Hiring kids benefits during this window while planning for the permanent $15,750 base deduction that continues indefinitely.

Take advantage of enhanced Hiring kids benefits with Instead

The One Big Beautiful Bill Act's enhanced standard deduction creates an exceptional opportunity to reduce your family's tax burden while building your children's financial future. With children able to earn $16,750 tax-free in 2026 and payroll tax exemptions potentially saving thousands more, strategic family employment has never been more valuable.

Instead's comprehensive tax platform simplifies the implementation of the Hiring kids strategy with automated calculations, documentation templates, and compliance monitoring. Our intelligent system helps you identify the optimal compensation structure for each child while ensuring proper payroll processing and record-keeping.

Explore pricing plans to discover how Instead can help your family capture every available tax benefit under the One Big Beautiful Bill Act.

Frequently asked questions

Q: How much can my child earn tax-free in 2026 under the One Big Beautiful Bill Act?

A: Children can earn up to approximately $16,750 tax-free in 2026, consisting of the permanent enhanced standard deduction of $15,750 plus the temporary $1,000 enhancement for single filers. This amount may increase slightly with inflation adjustments applied to the base amount starting in 2026.

Q: Does my business structure affect Hiring kids payroll tax savings?

A: Yes, business structure significantly impacts payroll tax savings. Sole proprietorships, Schedule F farms, and spousal partnerships qualify for Social Security, Medicare, and FUTA exemptions for children under specified ages. S Corporations and C Corporations do not receive these payroll tax exemptions, though children still benefit from the enhanced standard deduction.

Q: What documentation do I need to support wages paid to my children?

A: Maintain written job descriptions, time tracking records, payroll records showing wages paid, completed W-4 forms, bank deposit records matching payroll amounts, and evidence of work completed. Document your methodology for setting reasonable compensation based on comparable local wage rates.

Q: Can I hire my grandchildren and receive the same tax benefits?

A: Grandchildren do not qualify for payroll tax exemptions available to children. However, grandchildren working in your business can still claim the enhanced standard deduction of $16,750, making their wages tax-free up to that amount while providing you with a business deduction for reasonable compensation paid.

Q: How does the Hiring kids strategy work with retirement account contributions?

A: Children with earned income from family employment can contribute to Roth IRAs or other retirement accounts. They can earn up to $16,750 tax-free, then contribute up to $7,000 (2025 limit, adjusted for inflation) to a Roth IRA. The combination provides tax-free current income plus decades of tax-free investment growth.

Q: When does the enhanced standard deduction under the One Big Beautiful Bill Act take effect?

A: The permanent enhanced standard deduction of $15,750 for single filers applies to tax years beginning after December 31, 2024, meaning 2025 and beyond. The temporary additional $1,000 enhancement applies to tax years 2025 through 2028, providing maximum benefits during this four-year window.