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. 

Roth Saving Opportunities

Working for the family business teaches kids fiscal responsibility and provides them with extra spending money. However, you might also want to encourage your child to use some or all of the wages for long-term goals, such as saving for college or retirement.

For example, your child's (or grandchild's) wages count as earned income that can be contributed to an IRA, with the potential for impressive compounding over time. The only tax-law requirement for your child to make annual IRA contributions is having earned income that at least equals what's contributed for that year. Age is completely irrelevant. So, if your child earns some cash from a summer job or part-time work after school, he or she can contribute to an IRA for that year.

For the 2025 tax year, people under age 50 can contribute the lesser of:

• His or her earned income or
• $7,000.

While the same contribution limit applies equally to Roth IRAs and traditional deductible IRAs, the Roth option usually makes more sense for young people. Why? First, kids are usually in a lower tax bracket now than in retirement. Second, your child can withdraw all or part of the annual Roth contributions—without any federal income tax or penalty—to pay for college or for any other reason. However, Roth earnings generally can't be withdrawn tax-free before age 59½.

In contrast, if your child makes deductible contributions to a traditional IRA, any subsequent withdrawals must be included in gross income. Even worse, traditional IRA withdrawals taken before age 59½ may be hit with a 10% early withdrawal penalty tax unless an exception applies. (Several exceptions exist, including to pay for qualified higher-education expenses and up to $10,000 in qualified first-time homebuyer costs.)

Important note: Even though a child can withdraw Roth contributions without any adverse federal income tax consequences, the best strategy is to leave as much of the Roth account balance as possible untouched until retirement (or later) to accumulate a larger federal-income-tax-free sum.

By making Roth contributions for just a few teenage years, your child can potentially accumulate a significant nest egg by retirement age. Realistically, however, most kids might not be willing to contribute the $7,000 annual maximum even when they earn enough to do so. However, as long as they have earned income, you can give them the money to fund an IRA (up to the amount of their earnings).

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.

Encouraging your child or grandchild to make Roth IRA contributions is a great way to introduce the idea of saving money and investing for the future. It's also never too soon for children to learn about taxes and how to legally minimize or avoid them. Contact your SSB tax advisor for more information.