Help Wanted: Hiring Family Members for Tax-Saving Results

If you own a small business and have children in high school, technical school or college, you might consider asking them to work for you part-time or full-time over the summer. Or you might want to hire your spouse or another relative for an open position. Hiring relatives allows them to earn some extra money and learn about the family business. Plus, there may be tax advantages and savings opportunities that could sweeten the deal. Here's what you should know.

Payroll Tax Breaks

Owners of certain unincorporated businesses who hire their kids may be eligible for payroll tax breaks. If your children are under age 18, you can hire them for full- or part-time work, and their wages will be exempt from Social Security and Medicare (FICA) taxes and federal unemployment (FUTA) tax. But there's an important catch — to be exempt, your business must be structured as one of the following entities:

• A sole proprietorship,
• A single-member limited liability company (LLC) that's treated as a sole proprietorship for tax purposes,
• A spousal partnership, or
• A spousal LLC that's treated as a partnership for tax purposes.

The FICA tax exemption applies to both:

• The employee's share of FICA tax that's withheld from the employee's paychecks, and
• The employer's share of FICA tax that your business must pay to Uncle Sam.

Important: The FUTA tax exemption lasts until an employee-child reaches age 21. If your child is 18 or older, his or her wages will be subject to FICA tax, like any other employee.

If you operate your business as an S or C corporation, your child's wages from the business are subject to FICA and FUTA tax, like any other employee, regardless of the child's age.

Potential Federal Income Tax Savings

When you hire your child, your business can deduct his or her wages for federal income tax purposes. Deductible wages may also lower your state income tax obligation and self-employment tax, if applicable. Of course, the wages must be reasonable for the work performed to be deductible.  

In addition, thanks to today's generous standard deduction, child employees — regardless of their ages — won't owe any federal income tax on wages from your business below the following thresholds for 2025:

• $15,000 if the child files as a single taxpayer,
• $22,500 if the child files as a head of household, and
• $30,000 if the child is married and files jointly.

Important: These thresholds are based on the assumption that the child has no taxable income from other sources. As earned income, your child's wages also won't be subject to the so-called "kiddie tax."

These income tax benefits may also be available if you hire extended family members, such as grandchildren, nieces and nephews, and even your parents.

Small Business, Big Tax Breaks

Hiring relatives can be a tax-smart idea for small business owners. Remember that their wages must be reasonable for the work performed. So, this strategy works best with teenage children or adult family members to whom you can assign meaningful tasks. Keep the same records as you would for any other employee to substantiate hours worked and duties performed (such as timesheets and job descriptions). And, of course, issue your relative a Form W-2, as you would for any other employee. Contact your tax advisor for more information.