Hiring Family Members for Tax Savings (2025 Guide)

sonya9686
Sep 19
3 min read

Are you a small business owner, high-income professional, or savvy taxpayer looking for legal ways to reduce your tax bill? One often-overlooked strategy is employing your family members – your children, spouse, or even retired parents – and paying them through your business.

Done correctly, this approach allows you to:

Shift income into lower tax brackets
Take advantage of IRS exemptions
Jump-start your children’s savings
Keep money in the family

This 2025 guide explains how to legally employ family members as a tax-saving and wealth-building strategy. We’ll cover IRS rules (payroll taxes, “reasonable” pay, and documentation), the unique perks of hiring kids under 18, the pros and cons of employing your spouse or adult children, strategies for sole proprietors vs. S-Corps, common pitfalls, and real-world examples of savings.

Let’s dive in to see how family employment can be a win-win for your finances—if you follow the rules.

Visit Website Here

Why Consider Hiring Family Members?

Hiring family members isn’t just about giving your loved ones jobs – it can significantly benefit your tax situation and your family’s financial future. Here’s why many smart business owners put family on the payroll:

Income Shifting to Lower Brackets:

Paying wages to a family member effectively moves income from your higher tax bracket to their lower bracket. For example, instead of all your business profit being taxed at (say) 35%, a portion paid as salary to your child might be taxed at 0–10% (or not at all), drastically cutting the family’s overall tax bill. This income splitting can even drop you into a lower tax bracket.

Tax-Deductible for You, Tax-Free for Them:

Wages you pay to family are a business expense – deductible against your business incomeblog.turbotax.intuit.com. Meanwhile, your family member may pay little or no tax on that income. In fact, a child can earn up to the standard deduction amount (about $14,600 for 2024, rising to roughly $15,750 in 2025 for single filers) and owe zero federal income. That means you could deduct, for example, $15,000 of wages and your child pays nothing on it – a powerful shift of taxable income out of your return.

Building Family Wealth (IRAs & Benefits):

By giving your child or spouse earned income, you open the door for them to contribute to retirement accounts like Roth IRAs or 401(k)s in their namekiplinger.com. A teenager with a wage can contribute up to the IRA limit (e.g. $6,500) into a Roth IRA each year – creating tax-free investment growth for decades. Similarly, employing your spouse can unlock additional retirement contributions and enable your business to offer family health benefits or other perks (discussed later).

Teaches Work Ethic & Involves Family:

Beyond taxes, having your kids help in the family business instills responsibility and real-world skills. It turns “family time” into productive time and lets your spouse or children contribute to the family enterprise in a meaningful way. Many parents also find that involving kids fosters entrepreneurship and a strong work ethic. (These intangibles are a nice bonus, but we’ll focus mainly on the concrete tax benefits and rules.)

In short, hiring family can keep more money in the family. But to reap these benefits, you must follow IRS rules and treat them like legitimate employees. Let’s break down how to do it right for each type of family member.

Final Takeaways

Hiring your family members isn’t just about reducing your tax bill—it’s a strategy that builds long-term wealth, strengthens your business, and keeps more money in your household. From income shifting to Roth IRA contributions, the financial advantages can be significant when done correctly.

But here’s the key: the IRS requires proper documentation, payroll setup, and “reasonable” compensation for your deductions to hold up. Done right, this is one of the most valuable strategies available to business owners. Done wrong, it can create tax headaches.

That’s where expert guidance matters.

Whether you’re considering paying your kids under 18, bringing your spouse onto payroll, or aligning your tax plan with family employment strategies, we can help you structure it properly and maximize your savings.