Utilize Family Employment: A Smart Tip for Small Business Owners!

Joe Mardesich
May 2
2 min read

As a small business owner, you're always looking for legal, efficient ways to reduce expenses, optimize your taxes, and keep the business running smoothly. One often underutilized but highly effective bookkeeping and tax strategy is employing family members particularly your spouse or children. Done correctly and with proper documentation, this tactic can lead to significant tax advantages, income shifting, and long-term financial benefits for your entire household.

Why Consider Hiring Family Members?

Hiring your spouse or children isn’t just about keeping it in the family it’s a strategic financial move. Here's why:

Tax Savings: Wages paid to family members can be a deductible business expense, reducing your overall taxable income.
Retirement Contributions: A spouse on payroll becomes eligible for benefits like 401(k) contributions or health insurance under your business.
Income Shifting: Paying your child can move income from a higher tax bracket (yours) to a lower one (theirs).
Payroll Tax Exemptions: Children under 18 working for a parent’s sole proprietorship or partnership (where both parents are partners) are exempt from Social Security, Medicare, and FUTA taxes.

How to Do It Right: Key Bookkeeping Practices

To take advantage of this strategy without triggering IRS red flags, it’s critical to follow legitimate business procedures. Here’s what you need to do:

1. Assign Real Work

Make sure the family member is performing actual tasks filing, bookkeeping, social media management, packaging products, etc. The work should match their skill level and business needs.

2. Pay Reasonable Wages

Compensation must be in line with what you’d pay a non-family employee for the same job. Document job responsibilities and wage rationale.

3. Keep Proper Records

Maintain:

A written employment agreement.
Regular timesheets.
Pay stubs.
Payroll tax filings (as applicable).

Good bookkeeping means treating them like any other employee when it comes to documentation and tracking hours.

4. Use Payroll Software

To streamline the process, consider using payroll and bookkeeping tools like:

QuickBooks Payroll.
Gusto.
Patriot Payroll.

These platforms help manage direct deposits, tax withholdings, and reporting requirements.

5. Understand Tax Rules

Depending on your business structure and your family member’s age, tax implications differ:

Children under 18 working for a parent’s sole proprietorship may be exempt from payroll taxes.
If your business is a corporation, you must withhold and pay payroll taxes even for your children.

Consult with a tax professional to stay compliant with current IRS rules.

Real Example: Hiring Your Teenager

Let’s say you hire your 16 year old to help with inventory and social media marketing. You pay them $6,500 for the year below the standard deduction limit. That income is tax free for your child and fully deductible for your business. It's a win-win: they earn work experience and savings, and you lower your taxable income.