The Hidden Tax Advantages of Hiring Family Members

The Hidden Tax Advantages of Hiring Family Members

Hiring family members in your business isn’t just a sentimental or convenience-based decision—it can be a highly strategic move when it comes to reducing your tax burden and keeping more wealth inside the family. Done correctly, it’s one of the most underutilized tools in the tax-smart business owner’s playbook.

Let’s start with your children. If you’re a sole proprietor, single-member LLC, or partnership where both partners are parents of the child, you can legally pay your kids under the age of 18—and avoid paying Social Security, Medicare, and federal unemployment taxes on their wages. That’s a huge advantage, especially when you compare it to hiring a non-family employee, where payroll taxes can quickly add up. Plus, your child’s wages are tax-deductible to your business, which reduces your taxable income.

Even better? If you pay them under the standard deduction threshold (currently $14,600 for 2024), they may not owe any federal income tax at all. In other words, you’re shifting income from your higher tax bracket to their (likely) zero percent bracket—keeping more money in the family while lowering your tax bill. And if your child uses those earnings to fund a Roth IRA or save for college, you're teaching financial responsibility while building wealth early.

This strategy isn’t limited to your children. Hiring a spouse can also be beneficial. If your spouse doesn’t already earn income elsewhere, putting them on payroll can open the door to tax-advantaged retirement contributions, like solo 401(k)s or SEP IRAs. These accounts allow you to shelter thousands of dollars annually, reducing taxable income now while saving for the future. A spouse-employee can also qualify for benefits like health insurance and reimbursements, which are deductible to the business and tax-free to them.

But be warned—these tax benefits only apply if the work is legitimate and properly documented. Family members must actually perform real services for the business, be paid a reasonable wage, and receive payments through regular payroll like any other employee. Good record-keeping is essential, and it's smart to consult your tax professional before implementing this strategy.

In short, hiring family can turn payroll into a powerful tax tool—lowering your liability, increasing your deductions, and building generational wealth all at the same time. When done right, it's one of the few win-win scenarios in tax planning.

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