There are few things more rewarding than running a small business with the people you trust most—your family. But did you know there are also several tax advantages to bringing family members into the fold that could put real dollars back in your pocket?
Whether you’re forming an LLC, hiring family members, or simply paying a spouse or teenage child to help out in the business, the IRS gives some pretty generous perks when you keep it in the family (and do it the right way). Here's what you need to know.
1. Lower Payroll Tax Burden
If you’re hiring family members as employees—specifically your own children under 18—the IRS throws you a major bone: you don’t have to pay Social Security, Medicare, or FUTA taxes, as long as your business is a sole proprietorship or a partnership where both parents are partners. This exemption can save you thousands a year compared to hiring unrelated employees.
Pro Tip: This rule only applies to biological or adopted children—not nieces, nephews, or grandchildren.
2. Income Shifting = Tax Savings
This is a classic tax strategy. By hiring a family member (especially a child or lower-earning spouse), you’re moving income from your higher tax bracket to their lower one.
If they stay under the standard deduction threshold ($14,600 in 2024), they might pay zero federal income tax—and you get a full deduction on your books.
3. Build Wealth Within the Family
Hiring your kids isn’t just about tax strategy—it’s also about financial literacy and long-term planning. When they earn a wage:
- They can open a Roth IRA (yes, even at age 14).
- They gain work experience that counts.
- You keep the money in the family, legally and effectively.
The IRS is fine with this—as long as the work is real and the compensation is fair.
4. Turn Business Expenses Into Family Investments
Think of it this way: Instead of paying an outside contractor $8,000 for part-time help, you pay your college-aged daughter. You still get the deduction. She gets the income. And that money can now be used to fund education, build credit, or invest in her own future.
Hiring family members in small business settings can be one of the smartest ways to keep more of your profits working for your household.
Family payroll isn’t just a write-off—it’s a tool for generational wealth.
5. Qualify for Additional Fringe Benefits
When a family member becomes a bona fide employee (especially a spouse), you may be able to offer:
- Health insurance coverage
- Employer retirement plan contributions
- Reimbursement plans for expenses
This is particularly useful if your spouse doesn’t have benefits elsewhere. Structuring this properly can unlock powerful tax-free compensation options for them—and deductions for you.
FAQs: Hiring Family Members and Taxes
Can I deduct my family member’s salary as a business expense?
Yes, as long as they’re doing legitimate work and you pay a reasonable wage, their salary is deductible just like any other employee.
What tax advantages are there to hiring family members in a business?
Potential benefits include reduced payroll taxes, income shifting to lower brackets, and eligibility for tax-advantaged benefits like health insurance or retirement contributions.
Are there tax risks to hiring family members in my business?
Only if you treat it like a loophole instead of a legit job. The work must be real, well-documented, and compensated fairly to satisfy the IRS.
How can hiring family members reduce my business taxes?
Through deductible wages, exemption from payroll taxes (for kids), and lowering your net income—resulting in smaller self-employment and income tax bills.
Do family members have to pay employment taxes if they work for me?
Children under 18 working for a sole prop or both-parent partnership are exempt from Social Security, Medicare, and FUTA. Other family members follow standard employment tax rules unless special exemptions apply.
Bottom Line
Hiring family members is smart tax planning—but only if it’s structured right. From lowering payroll taxes to shifting income and creating long-term wealth strategies, this is one area where your business and your family’s future can grow together.
Check out: “Why You Need Your Own Family Office (And How to Set It Up)” for more details and tax-saving tips
Take the Next Step Toward Smarter Tax Strategy
If you want to build generational wealth and keep more money in the family, don’t stop here.
Explore our free family tax resource: "Family Incorporated: How to Pay Your Kids, Spouse, and Relatives in Business." for practical strategies that make a difference.
Need expert help? Find a trusted advisor who gets Main Street business values in our Tax Advisor Network.
Want to become that advisor? Book a Discovery Call to learn how our Main Street Tax Advisor Certification can elevate your skills—and your practice.
