The Tax Benefits of Hiring Your Kids & Family Members In Your Business

Running a business often means looking for ways to save on taxes and use your resources wisely. Bringing your kids or other family members into the business could be one option worth exploring. It not only gives them real-world work experience but may also create potential tax savings for your company.

Paying a fair wage to family members may let you deduct their pay as a business expense, which can lower your taxable income. In some cases, it can also move income into a lower tax bracket if your family members earn less. For children under age 18 working for a sole proprietorship or a partnership where each partner is a parent, their wages are generally exempt from Social Security and Medicare (FICA) taxes. This exemption does not apply to corporations or partnerships with non-parent partners.

Hiring family members doesn’t work for every business, but it’s worth looking into if you’re planning ways to manage your tax burden. Make sure the work is legitimate, the pay is reasonable, and all labor laws are followed. Talking with a qualified tax professional can help you see if this approach fits your situation.

Here’s everything you need to know about hiring your kids and family in your business.

Tax Benefits of Hiring Family Members

Hiring your kids or other family members can do more than help your business run smoothly. It may also create potential tax savings if structured properly. Below are some of the main areas where hiring family members could help reduce taxes.

Income Shifting

When you employ family members, you may be able to shift part of your business income to them. This can move income into lower tax brackets and reduce the total tax the family pays overall.

✏️ Hypothetical Example:

This arrangement reduces your taxable income and moves part of it into a lower bracket. The family’s combined tax bill may be less than if the entire $100,000 stayed in the higher bracket.

📝 Note: Wages must be reasonable for the work performed and properly documented to comply with IRS rules.

Potential Reduction in Employment Taxes

Hiring certain family members may also lower employment taxes in specific cases. For example:

✅ Children under age 18 working for a parent’s sole proprietorship or a partnership where both partners are parents are generally exempt from Social Security and Medicare (FICA) taxes
❌ This exemption does not apply if the employer is a corporation or a partnership with non-parent partners

Here’s an example of potential savings on FICA taxes:

Age of Child	Wages Paid	Social Security & Medicare Taxes Saved
Under 18	$15,000	$2,295
18–21	$15,000	$0.00

📌 Note: This table assumes the child is employed by a parent’s sole proprietorship or a partnership where each partner is a parent. For children under age 18, both employer and employee FICA are not owed. For ages 18–21, there is no FICA exemption, although FUTA is exempt under age 21 (not shown here).

Family-Related Tax Credits

There are also potential credits that may be relevant. Some are business credits, while others are personal credits:

✅ Child and Dependent Care Tax Credit (CDCTC): A personal credit claimed by individual taxpayers who pay for care so they can work. Allowable expenses are generally up to $3,000 for one qualifying individual or $6,000 for two or more.

✅ Employer-Provided Childcare Credit (IRC Section 45F): A business credit available to companies that install or operate childcare facilities. It equals 25% of qualified childcare facility expenses plus 10% of qualified resource and referral expenses, capped at $150,000 per year.

📝 Note: Business-side credits differ from personal credits and have their own requirements. Consult a tax professional to understand which credit may apply to your situation.

Tax Benefits of Hiring Your Children

Hiring your children can come with special advantages, especially before they turn 18. When set up correctly, it can help reduce your taxable income while giving them valuable work experience and a head start on saving for the future.

Tax Benefits for Minors

Children under age 18 can generally earn a meaningful amount of income from a parent’s business without paying federal income tax, depending on their total income and deductions.

When the parent’s business is a sole proprietorship or a partnership where both partners are parents, wages paid to a child under age 18 are typically exempt from Social Security and Medicare (FICA) taxes. This exemption does not apply if the employer is a corporation or a partnership with non-parent partners.

📝 Note: The work must be legitimate, and wages must be reasonable and properly documented to comply with IRS requirements.

Setting up a Roth IRA for your kids

Children with earned income may also be eligible to contribute to a Roth IRA, often through a custodial Roth IRA. Parents can contribute on behalf of the child up to the amount of the child’s earned income, subject to the annual limit ($7,000 for 2024 and $7,000 for 2025). This approach could allow your child to begin building tax-advantaged savings early.

✏️ Hypothetical Example of Early Saving Impact:

If a child begins contributing the maximum each year at age 13 instead of age 21, the difference in retirement savings could be dramatic. Over decades, even a small head start can add up. In one scenario assuming an 11% average annual return, starting contributions eight years earlier could result in a retirement account that is significantly larger by age 65.

📝 Note: Investment returns vary, and growth is not guaranteed. A Roth IRA’s benefits depend on meeting the qualified withdrawal rules (age 59½ and five-year rule).

Best Practices When Hiring Family Members

Hiring your kids or other family members can be a smart move for your business, but it comes with added responsibility. Following fair and legal practices helps protect your company’s reputation and avoids issues with the IRS or labor agencies.

Pay Fair Wages and Offer Reasonable Working Conditions

Family members should be paid just like any other employee—based on their skills, experience, and the value they bring to your business. Be mindful of minimum wage laws and avoid inflated pay that wouldn’t make sense for the role. For example, paying a 10-year-old $100,000 a year to answer phones will likely raise IRS red flags. Competitive, reasonable wages show professionalism and keep you compliant.

Follow Labor Laws and Regulations

Even if it’s your own child or sibling, you’re still the employer. That means you’re responsible for complying with all applicable labor laws, including limits on working hours, overtime, and benefits. Make sure you have any required permits before hiring minors and understand the child labor rules for their age group and type of work.

Keep Records and Documentation

Treat your family hires as official employees. This includes creating written job descriptions, tracking hours worked, and filing the necessary tax forms—like issuing a Form W-2 for wages paid. Keeping separate bank accounts for your child’s earnings can also help demonstrate transparency and keep the business books clean.

Avoid Favoritism and Conflicts of Interest

It’s natural to want to help your family, but it’s important to apply the same standards to everyone. Avoid giving special treatment in promotions, evaluations, or job duties. Equal treatment helps your team feel respected and protects your business from claims of unfairness or nepotism.

Real-Life Examples of Hiring Family Members

Bringing family into your business can open up real tax benefits when done correctly. Here are a few scenarios to show how it works in practice:

Example #1: Hiring Your Children

Imagine you run a small business and have two kids—one is 16, the other 18. You hire them to work during the summer for 12 weeks, paying each $5,000. That’s $10,000 in total wages you can deduct from your business income, reducing your taxable income by that amount.

For 2025, the standard deduction for a single filer is $15,000. At $5,000 each, neither child would owe federal income tax (though state or local rules could differ).

Example #2: Hiring Your Spouse

Hiring your spouse can bring multiple advantages. For example, employer-paid health coverage for a bona fide employee-spouse is typically an excludable fringe benefit for the spouse and a deductible business expense for you.

If you’re a sole proprietor or part of a partnership with your spouse, you can usually deduct 100% of your spouse’s wages as a business expense, which lowers your taxable income. (Specific plan and eligibility rules apply.)

Example #3: Hiring Your Parents

Say you own a business and your parents are retired but want to work part-time. You pay each of them $10,000 a year. That’s $20,000 in total wages you can deduct from your business income, lowering your taxable income.

However, wages paid to a parent are still subject to Social Security and Medicare taxes (FICA), though not to federal unemployment tax (FUTA). Age alone doesn’t exempt them from these requirements.

Frequently Asked Questions

How much can I pay my child tax-free in 2025?

For 2025, the standard deduction for a single filer is $15,000. A child who earns only wages up to that amount would generally owe no federal income tax (state rules may vary).

Wages above $15,000 or other sources of income could create a federal tax liability. FICA and FUTA treatment depends on the family-employee rules, such as whether the parent’s business is a sole proprietorship or a partnership owned only by the parents.

Which jobs can children perform in a family business?

Children can help with many types of tasks as long as the work is legitimate, age-appropriate, and complies with child labor laws. Examples include:

✅ Basic office tasks (filing, data entry, answering phones)
✅ Cleaning or organizing stock areas
✅ Landscaping or yard maintenance
✅ Distributing marketing materials
✅ Managing or updating a website or social media

📝 Note: The work should genuinely benefit the business, not just exist on paper.

At what minimum age can a child be put on payroll?

The Fair Labor Standards Act (FLSA) includes a parental exemption. In a business solely owned by the parent(s):

However:

What tax strategies should be considered when hiring your children?

Here are a few to explore:

📝 Note: Wages must be reasonable and comparable to what you’d pay a non-family employee for the same work.

How do you properly pay a family member in a small business?

To stay compliant and organized:

Wrapping It Up

Bringing family members into your business can be more than just a staffing choice. When done properly, it may also create meaningful tax and financial advantages. The key is to treat these arrangements like any other employment relationship — document roles, pay fair wages, and follow federal and state rules.

A few tips to keep in mind:

Handled carefully, hiring your kids or other relatives can strengthen your business, provide valuable experience for them, and potentially reduce your family’s overall tax burden.

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