This May Be The Best Way to Structure Payments to Your Children!

May 4th, 2026 at 7:19 AM

Here’s an often-overlooked tax strategy that can generate substantial family tax savings when handled correctly. If you pay a family member (or even a non-relative) for a one-time project, the tax treatment can be highly favorable—but only if you follow the proper reporting rules.

For example, paying a college-aged child $23,255 for legitimate services can produce significant benefits. In one case, this created an $8,593 tax deduction for the payor, while the student owed only $713 in tax—resulting in a net family tax savings of $7,880. And of course, the student has the $23,255.

But beware. There are three critical areas where mistakes commonly occur.

1. Form 1099 Reporting

Unlike typical contractor payments, you do not report this income on IRS Form 1099-NEC. Instead, because it is not subject to self-employment tax, you report it in box 3 of IRS Form 1099-MISC. This distinction is essential.

2. Kiddie Tax Treatment

Although many assume the kiddie tax applies, it does not in this case. The income qualifies as earned income because it is payment for actual services performed. Kiddie tax rules apply only to unearned income (such as investment income).

3. IRA Contribution Opportunity

This earned income qualifies as “compensation,” meaning the recipient can contribute up to $7,500 (2026 limit) to a traditional or Roth IRA.

Mark S. Fineberg, CPA