Did you know that as a small business owner, you can hire family members to maximize profit and reduce tax liability?

One underutilized strategy is hiring family members, including your kids or parents, to shift income into lower tax brackets.

This approach not only saves on taxes but also helps you build financial literacy within your family.

In this blog, we’ll dive into how hiring family members can benefit your business, the legal considerations, and tips for doing it correctly to stay compliant with tax laws.

Why Hire Family Members?

The main tax advantage of hiring relatives is the ability to shift income from your tax bracket to theirs.

If you’re in a higher income bracket, paying wages to a family member in a lower (or even zero) bracket reduces your business’s taxable income while allowing them to earn income at a reduced tax rate.

Additionally:

• Your child’s earnings qualify as income, meaning they can open a Roth IRA and start saving early with the power of compound interest.
• Paying older relatives (like parents or adult children) with little or no other income helps distribute wealth within the family and provides a financial cushion for them.

The Right Way to Hire Family Members

The key to getting tax savings while staying compliant lies in following the rules set by the IRS and Department of Labor.

Let’s explore the correct procedures based on the family member’s age and your relationship with them.

Hiring Family Members Over 21 Years Old

For adult children, parents, or relatives:

• You can hire them like any other employee and pay them a fair wage.
• Your business gets a tax deduction, while the family member’s income is taxed at a lower rate.
• Payroll taxes (FICA) still apply, but the overall tax savings could outweigh these costs if the family member is in a low or zero-tax bracket.

Hiring Kids Aged 14–21

This age range is ideal for employing your children, but you’ll need to follow certain guidelines:

• If you’re the parent and sole owner of the business (or a partnership with your spouse), you may be exempt from payroll taxes if your child is under 18.
• If you operate as an S Corp or C Corp, payroll tax exemptions may no longer apply, making it slightly more complex.

If your business has additional owners or you want to employ non-children relatives, consider setting up a family management company. In this structure:

1. The parents establish a family management company.
2. The management company pays the child or family member.
3. Your business invoices the family management company for services performed.

This setup allows for additional tax flexibility but must be carefully documented.

What About Kids Under 14?

Employing kids under 14 requires special consideration:

• Parent-owned businesses (LLCs or sole proprietorships) enjoy exemptions from child labor laws.
• If you’re not the child’s parent (e.g., you’re a grandparent or aunt/uncle), the child labor laws do not allow direct employment. However, using a family management company owned by the child’s parent can solve this issue.

This setup allows even young children to work within family businesses—think modeling, administrative tasks, or customer service—while following labor laws.

Best Practices for Hiring Family Members

To ensure compliance and reap the full tax benefits, follow these best practices:

1. Document all work and wages
   • Use time-tracking apps or spreadsheets to log hours worked.
   • Keep copies of contracts and task assignments.
2. Pay a reasonable wage
   • The wage must align with what you’d pay a non-family member for similar work. The IRS scrutinizes overly high wages as attempts to evade taxes.
3. Update Employee Handbooks
   • Add policies about family member employment and ensure clear rules on overtime approval.
4. Consider a Family Management Company
   • If your business structure doesn’t allow direct employment of family members, setting up a family management company ensures compliance.

Maximize Long-Term Savings: Start a Roth IRA for Your Kids

One of the biggest advantages of paying kids wages is their eligibility to open a Roth IRA. Contributions to a Roth IRA grow tax-free, and starting young gives them a huge advantage in compounding returns.

For example, if a child contributes just $1,000 annually starting at age 10, they could accumulate millions by retirement age.

If you’re interested in this strategy, I highly recommend watching my video on how to turn your child into a millionaire with a Roth IRA—you won’t believe how powerful this strategy can be!

Conclusion: Is Hiring Family the Right Move for Your Business?

Hiring family members can be a smart financial strategy if done correctly.

Whether it’s employing your children for summer jobs or paying your parents to assist with business tasks, the key is to follow the rules, document everything, and ensure wages are reasonable.

If you need more help navigating this process, check out my Hiring Your Kids Toolkit, which includes contracts, time logs, and video tutorials to get you started.

You’ll also get step-by-step guidance on how to maximize your tax savings without running afoul of the IRS.

👉 Explore the Hiring Your Kids Toolkit: Hiring Your Kids Toolkit
👉 Learn more in the Kids on Payroll Masterclass: Kids on Payroll Masterclass

Watch the Video

For more details on how to hire family members and structure your payroll, watch Should You Hire your Family Members to Save on Taxes? ⬇️

This transcript is a not a direct copy of the video and has been formatted for readability.

Should you hire your family to help you save on taxes? As business owners, we’re always looking for ways to reduce tax liability. One effective strategy could be hiring your kids—or even your parents or other relatives—to work in your business. In this transcript, we’ll explore how hiring family members can offer tax advantages, how to do it the right way, and a few considerations to keep everything compliant.

Before we dive into the process, let’s talk about the benefits. The key advantage is shifting income from your higher tax bracket to a family member’s lower bracket. For instance, a child or relative with little to no other income may pay fewer or zero taxes on wages earned from working for your business. When you pay them wages, you can deduct those payments as business expenses, lowering your taxable income.

Another great benefit of giving kids earned income is the ability to set up a custodial Roth IRA for them. Starting young lets them build wealth over time through compounding interest, setting them up for long-term financial success.

How to Properly Hire Family Members

Let’s walk through the essential rules to make sure you’re doing this right and staying compliant with the IRS and labor laws.

1. Ages 21 and Over
   Hiring adult family members like parents or adult children is straightforward. You can pay them a fair wage, write off those wages as business expenses, and shift some of your taxable income into their lower bracket. However, standard payroll taxes (FICA) still apply in these cases.
2. Ages 14 to 21
   If you’re hiring kids between 14 and 21 years old, things become a little more complicated. First, if you’re their primary guardian, your business structure will impact the tax benefits.
   • If your business is an LLC or sole proprietorship (not a corporation) and you or your spouse are the only owners, you’ll be exempt from federal payroll taxes if the child is under 18. For children under 21, federal unemployment tax exemptions may also apply.
   • If your business is taxed as an S Corp or C Corp, payroll tax exemptions won’t apply, making it a little less advantageous.

If you’re not the child’s guardian—for example, if you’re a grandparent hiring a grandchild—consider using a family management company. The child’s parent can set up a sole proprietorship or LLC to manage the child’s work. Your business can then invoice the family management company, which in turn pays the child.

3. Under 14 Years Old
   For kids under 14, child labor laws are stricter, but parent-owned businesses (such as sole proprietorships or LLCs) may be exempt. If both or one parent owns the business, the child can legally work and earn wages without triggering those labor restrictions.

However, grandparents, aunts, or uncles cannot directly employ children under 14 in their businesses. In these cases, a family management company can be set up by the parent to enable the child to legally work on business-related tasks.

Best Practices for Hiring Family Members

1. Document the Work and Wages
   Family members must be treated like any other employees. Keep detailed records of the work performed and the wages paid. Use time-tracking apps or spreadsheets to log their hours.
2. Pay Reasonable Wages
   The wages must reflect what you’d pay a non-family employee for similar work. Overpaying family members could attract IRS scrutiny.
3. Update Your Employee Handbook
   Make sure your handbook reflects new rules, including clear policies on overtime. This helps prevent misunderstandings and ensures all employees know what’s expected.
4. Use Family Management Companies When Needed
   If your business structure doesn’t allow you to hire family members directly, setting up a family management company ensures compliance while providing tax advantages.

Roth IRA: A Long-Term Wealth Strategy for Kids

Once kids earn wages, you can set up a custodial Roth IRA for them. Roth IRAs grow tax-free, and starting contributions early allows their savings to grow exponentially through compound interest. Even small contributions at a young age can grow into a substantial nest egg by retirement age.

Closing Thoughts

Hiring family members can provide significant tax benefits when done correctly. It’s a great way to shift income to lower tax brackets, provide financial education to your children, and even set them up for long-term financial success with a Roth IRA.

To simplify the process and ensure compliance, consider using my Hiring Your Kids Toolkit. It includes everything you need—like contracts and time logs—to hire family members legally and maximize tax savings.

👉 Explore the Hiring Your Kids Toolkit: Hiring Your Kids Toolkit
👉 Learn more in the Kids on Payroll Masterclass: Kids on Payroll Masterclass

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