Many small businesses are built with the help of family members. Whether it’s a spouse assisting with operations or kids helping after school, bringing family into the business can be both practical and rewarding.

What many business owners don’t realize is that hiring family members can also create some unique tax opportunities—if it’s structured correctly. Here are a few key things to know.

Family Members Can Be Employees

The IRS allows business owners to hire family members, but the tax treatment depends on the relationship and the structure of the business. The most common scenarios include:

• Children working for parents
• Spouses working in the same business
• Parents working for their children

Each situation has slightly different payroll and tax rules.

When Children Work in the Business

Hiring your children can be a great way to teach responsibility while helping with the business. It can also provide tax advantages.

If your business is a sole proprietorship or a partnership where both partners are the child’s parents:

• Wages paid to children under age 18 are not subject to Social Security or Medicare taxes
• Wages paid to children under age 21 are not subject to federal unemployment (FUTA) taxes

However, if the business is structured as a corporation, these exemptions typically don’t apply.

When Spouses Work Together

It’s very common for spouses to work in the same business. Depending on how the business is structured and how each spouse participates, the IRS may treat the business as a partnership.

In some cases, couples can elect a Qualified Joint Venture, allowing each spouse to report their share of income on their individual tax returns rather than filing a partnership return.

If one spouse is an employee of the other, their wages are subject to income tax withholding and Social Security/Medicare taxes, but not federal unemployment tax.

A Simple Tax Strategy to Consider

One strategy many small business owners use is employing their children in the business.

If structured properly, wages paid to a child may be tax-deductible to the business while the child may pay little or no federal income tax if their earnings fall within the standard deduction.

For example, if a child earns less than the annual standard deduction amount, they may owe no federal income tax, while the business still receives the wage deduction. This can be a legitimate way to shift income within the family while teaching financial responsibility.

Of course, the child must perform real work, be paid a reasonable wage, and the business should maintain proper payroll documentation.

Final Thoughts

Employing family members can strengthen your business while creating meaningful opportunities for your family. But as with most tax strategies, the details matter—especially when it comes to payroll rules and business structure.

If you’re considering hiring family members, it’s worth reviewing the setup to ensure everything is structured correctly and working in your favor.

Have questions about how this might work for your business? Our team would be happy to help you evaluate the options and make sure your approach is both compliant and strategic.