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Hiring family members in your business? Discover what the IRS needs to see — from proper documentation to payroll rules — to stay compliant and maximize your tax benefits.
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If you're a small business owner, hiring family members can seem like a smart move. Whether it's your spouse helping with administrative tasks or your teenager managing social media, keeping work in the family can offer convenience, trust, and potential tax advantages. But before you put your spouse or child on the payroll, it’s crucial to understand how the IRS views these arrangements.
In this guide, we’ll explore what the IRS expects from business owners who employ relatives. From documentation to payroll taxes, we’ll break down the steps you need to take to stay compliant — and avoid unwanted attention from Uncle Sam.
There are plenty of reasons business owners hire family members, including:
However, just because someone is family doesn’t mean the IRS will turn a blind eye to how you pay them. In fact, the IRS pays extra attention to related-party transactions, including employment.
The IRS doesn’t care that you’re related — they care whether the working relationship is real and verifiable.
To establish a bona fide employer-employee relationship, the following must be true:
💡 That means you can’t pay your 5-year-old $10,000 a year to "test toys" if you're running a CPA firm. The work must be age-appropriate, business-related, and documented.
One red flag for the IRS is inflated wages for minimal work. To avoid this, make sure:
💡 Let’s say you hire your 15-year-old to clean your office and manage basic social media. You pay $15/hour for 10 hours a week. That’s perfectly reasonable if those tasks would normally be worth $150/week to another worker.
Family or not, every employee should have:
The IRS expects you to treat family the same as you would any other employee. That means tracking when they worked, what they did, and how much they were paid — consistently.
Using a payroll system or even a simple spreadsheet can help you maintain records in the event of an audit.
Hiring family doesn’t exempt you from payroll tax obligations — but the type of relationship does affect how payroll taxes are handled.
Here’s a breakdown:
💡 Note: If your business is an LLC taxed as a corporation or an S-Corp, family employment may not qualify for the same exemptions. Corporate entities are separate from you as the owner, so IRS family employment rules may not apply.
To stay in compliance, make sure you file:
Even if the family member doesn’t owe taxes (due to low income), you still need to issue the correct forms if they’re on payroll.
The type of business entity you operate plays a major role in how the IRS treats wages paid to family members.
This is the most tax-friendly structure for employing your children.
🛠 Pro tip: If you’re hiring your children for long-term tax savings, consider whether your business structure supports that goal. You might even revisit your entity choice with a tax advisor.
One of the biggest perks of hiring your children? They can start investing for retirement decades earlier than their peers.
Imagine hiring your 13-year-old, paying them $6,000, and helping them put $3,000 into a Roth IRA. With 50 years of growth, that could turn into hundreds of thousands — even millions — in retirement savings.
📌 Bonus tip: Roth IRAs also allow contributions to be withdrawn (not gains) penalty-free, which can help with education or first-time home buying.
Hiring family opens the door to IRS scrutiny, so you need to be airtight with documentation. Here's how to protect yourself:
Clearly define:
✅ Example: “Junior Marketing Assistant: Responsible for social media post scheduling, caption writing, and light photo editing. $12/hour, 8 hours/week.”
Use a timesheet, app, or payroll software (like Gusto, QuickBooks Payroll, or Homebase) to log hours and tasks.
📌 Keep it as detailed as you would for any employee — “Worked 3 hours creating Instagram content, edited captions, and scheduled posts.”
Always pay through a traceable method:
This avoids any question of the payments being “gifts.”
Keep:
If the IRS ever asks, you’ll be ready to prove the relationship was 100% business legitimate.
If you pay your kids or spouse under the table, you can’t deduct those wages — and you risk penalties for failing to report payroll taxes.
Don’t pay your child $40/hour to "file papers" for an hour a week. The IRS can reclassify such payments as disguised gifts or disallow the deduction altogether.
Hiring a 7-year-old to do bookkeeping doesn’t fly with the IRS. The job must be suitable for their age and capability — think cleaning, organizing, stuffing envelopes, or helping with light administrative tasks.
Even if the IRS allows it, your state may have additional requirements for hiring minors, such as work permits or restricted hours. Check your local laws to ensure compliance.
If done correctly, employing family can lead to:
Wages paid to family members for legitimate work are deductible business expenses. That reduces your taxable income.
Paying your child up to the standard deduction — $15,000 for single filers in 2025 — could mean:
🔹 Zero federal income tax liability for your child
🔹 A full deduction for your business (if they perform legitimate work and you're a sole prop or partnership)
🔹 A smart tax strategy to keep more money in the family
📌 IRS Source: IRS 2025 Inflation Adjustments
Once your family member has earned income, they can contribute to a Roth IRA, 401(k), or other retirement accounts, helping them build wealth early.
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Sarah owns a digital marketing agency and files as a sole proprietor. She hires her 16-year-old daughter to create TikTok content, manage Instagram DMs, and update her website. The daughter works 8 hours/week at $17/hour during the summer and 5 hours/week during the school year.
Sarah:
Her daughter earns $6,500 for the year — below the standard deduction — so no federal income tax is owed, and Sarah gets a $6,500 business deduction. Win-win.
Here’s a quick checklist for hiring a family member:
✅ Define a job description
✅ Set a reasonable hourly wage or salary
✅ Collect a completed W-4 form
✅ Track hours and work performed
✅ Use a payroll service or software
✅ Pay via check or direct deposit
✅ File quarterly and annual tax forms
✅ Stay up to date with labor laws
Bonus tip: Take photos of your child doing the work (e.g., stocking shelves or helping at a trade show). It may sound silly, but it can serve as extra documentation if the IRS ever questions the arrangement.
If you’re unsure about the right structure, forms, or payroll setup — or if your business is more complex — consult a tax professional. They can:
Hiring family members can offer financial and emotional benefits, but only if it’s done by the book.
Hiring family members can be a fantastic way to build a legacy, teach financial skills, and reduce taxes — but only when it’s done correctly. The IRS allows these arrangements, but they also scrutinize them.
Treat your family like employees. Document everything. Pay fair wages. File the right forms. If you take those steps, you’ll be rewarded with smoother operations and possibly some valuable tax breaks.
✅ And remember: A trusted tax advisor can help you avoid costly mistakes while making the most of your family business structure.
Need help setting up payroll for your family or navigating tax deductions? Contact us today — we’ll help you keep it in the family and in compliance.
Book your consultation and take the first step toward cleaner books and better business decisions.
No. While there are tax advantages—especially if your child is under 18 and you’re a sole proprietor—you still need to run payroll, document hours, and issue a W-2. The IRS requires clear documentation, even for your own kids.
There’s no specific minimum age set by the IRS, but the work must be age-appropriate, safe, and legal. For example, younger children can do tasks like organizing files, labeling products, or helping with social media (under supervision). Always document the work and hours.
It depends on your business structure. If you're a sole proprietor, you don’t have to withhold FUTA tax, but Social Security and Medicare taxes still apply. If your business is a corporation, all standard employment taxes apply.
Yes! As long as the child has earned income, they can contribute to a Roth IRA (up to the lesser of their earnings or the annual contribution limit—$7,000 for 2024). You can give them the money to contribute, but the total contribution cannot exceed what they earned.
The most common mistake is treating it informally—no job description, no timesheets, no W-2s, or paying in cash. This raises red flags with the IRS and can result in disallowed deductions or penalties. Always document everything and run payroll like you would for any employee.
Being audited is comparable to being struck by lightning. You don't want to practice pole vaulting in a thunderstorm just because it's unlikely. Making sure your books are accurate and your taxes are filed on time is one of the best ways to keep your head down during tax season. Check out Vincere's take on tax season!
This post is just for informational purposes and is not meant to be legal, business, or tax advice. Regarding the matters discussed in this post, each individual should consult his or her own attorney, business advisor, or tax advisor. Vincere accepts no responsibility for actions taken in reliance on the information contained in this document.
For business tax planning articles, our tax resources provides valuable insights into how you can reduce your tax liability now, and in the future.
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