How Much Can You Pay Your Kid Tax-Free?

Parents often seek ways to provide financial support to their children while navigating tax regulations. Understanding available strategies can help families minimize tax implications for both parents and children. Several avenues exist for transferring value, each governed by specific tax rules that determine how much can be provided tax-free.

Employing Your Child in a Business

Hiring your child in a family business offers a tax-efficient way to transfer income. This strategy allows for legitimate payments to your child that are also deductible business expenses for the parent. For the arrangement to be valid, the child must perform actual, necessary work, and their compensation must be reasonable for the services rendered.

Payroll tax implications vary depending on the business structure. For a sole proprietorship or a partnership where only parents are partners, wages paid to a child under 18 are exempt from Social Security and Medicare taxes. This exemption provides a significant saving on payroll taxes for both the business and the child. However, this exemption does not extend to corporations or partnerships with non-parent partners.

Wages paid to a child under 21 by a parent’s sole proprietorship or partnership are exempt from federal unemployment tax (FUTA). This exemption offers additional tax savings. These payroll tax benefits make direct employment an attractive method for income transfer within certain business structures.

From the child’s perspective, the wages received are considered earned income. A significant benefit of this approach is that the child can earn up to the standard deduction amount without incurring federal income tax liability. For 2025, the standard deduction for a single individual is $15,750, meaning a child can earn up to this amount tax-free from wages.

The business benefits by deducting the wages paid to the child as an ordinary and necessary business expense. This deduction reduces the parent’s taxable income, leading to lower overall tax obligations for the family. By combining payroll tax exemptions with the income tax deduction, employing a child can be an efficient way to transfer funds.

Utilizing Annual Gift Tax Exclusions

The annual gift tax exclusion provides a method for parents to transfer money or assets to their children without triggering gift tax. This exclusion allows an individual to give a specific amount to any number of recipients each year without incurring gift tax or filing Form 709. For 2025, this annual exclusion amount is $19,000 per recipient.

Gifts made within this annual limit do not count against the donor’s lifetime gift and estate tax exclusion, which is a much larger amount. This allows such gifts to be made repeatedly each year without reducing the total amount that can be transferred tax-free over a lifetime or at death. The gift tax is the donor’s responsibility, and gifts are not considered taxable income for the recipient.

Both parents can individually utilize this exclusion. If both parents gift to the same child, they can collectively transfer double the annual exclusion amount, totaling $38,000 for 2025, without gift tax implications. This doubles the amount that can be transferred tax-free each year. This strategy allows for consistent financial support for children over time.

Paying for Educational and Medical Costs

Direct payments for specific educational and medical expenses offer an avenue for tax-exempt transfers to children. These payments are entirely excluded from gift tax, regardless of the amount, providing unlimited support for these needs. This exclusion is separate from and in addition to the annual gift tax exclusion.

For educational expenses, payments must be made directly to the educational institution. These payments must be for tuition and fees only. Expenses such as books, supplies, or room and board do not qualify for this gift tax exclusion and would fall under the annual gift tax exclusion if transferred.

Direct payments for medical care are exempt from gift tax. These payments must be made directly to the medical care provider. Covered expenses include diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body, as well as transportation for medical care.

The direct payment requirement is an important aspect of both these exclusions. Funds cannot be given to the child to pay the institution or provider; the payment must bypass the child entirely. This unlimited exclusion allows parents to cover educational and medical costs for their children without consuming their annual gift tax exclusion or lifetime exemption.

Child’s Individual Income Tax Impact

Income or financial support can impact a child’s federal income tax liability, particularly concerning their standard deduction and the “kiddie tax” rules. Understanding these rules helps determine how much a child can receive or earn tax-free. The standard deduction for a child depends on whether their income is earned or unearned.

For earned income, such as wages from employment, a child can claim a standard deduction equal to the greater of $1,350 or their earned income plus $450, up to the full standard deduction amount for a single taxpayer. For 2025, the standard deduction for a single individual is $15,750, meaning a child can earn up to this amount in wages without owing federal income tax. This allows children to work and save earnings tax-free.

Unearned income, which includes interest, dividends, and capital gains from investments, is treated differently for tax purposes. For a child with unearned income, the standard deduction is limited. For 2025, the first $1,350 of unearned income is tax-free. The “kiddie tax” rules apply when a child’s unearned income exceeds certain thresholds.

If a child’s unearned income is above $2,700, a portion of that income may be taxed at the parent’s marginal income tax rate. The first $1,350 of unearned income is tax-free, the next $1,350 is taxed at the child’s rate, and income above $2,700 is taxed at the parent’s rate.

The kiddie tax applies to children under 18 at the end of the tax year, and sometimes to 18-year-olds or full-time students aged 19 to 23. If a child’s gross income exceeds certain thresholds, they are required to file their own federal income tax return.