Hiring Family Members — Tax Benefits & Pitfalls

Hiring your spouse, child, or other relatives can be an excellent way to keep income within the family — and in many cases, it can also reduce your overall tax bill. But it’s not as simple as adding a family name to payroll. The IRS has strict rules about what qualifies as legitimate employment, how to handle payroll taxes, and when deductions are allowed.

At Velin & Associates, Inc., we often advise small business owners, doctors, dentists, YouTubers, and online entrepreneurs on how to structure family employment the right way — to maximize tax benefits while avoiding costly mistakes.

💡 The Tax Benefits of Hiring Family Members

1. Hiring Your Children — Shifting Income to Lower Brackets
   
   If you own a business, hiring your child can be a smart tax move.

• For example, a freelance filmmaker or YouTuber who hires their teenage child to help with editing or managing social media can pay them a reasonable wage for real work performed.
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• Wages paid to your child are deductible as a business expense, reducing your taxable income.
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• And if your child earns less than the standard deduction (around $14,600 for 2024), they may pay no federal income tax on that income at all.

If your business is a sole proprietorship or a partnership where both partners are the child’s parents, the child’s wages are not subject to Social Security or Medicare taxes until the child turns 18, and not subject to federal unemployment tax (FUTA) until they turn 21.

Example:
A Shopify Store owner in Los Angeles earns $180,000 annually and decides to hire their 16-year-old daughter to help with bookkeeping and managing product listings. By paying her $10,000 for legitimate work — supported by time sheets and clear job duties — the owner can shift income from their higher tax bracket to their child’s lower bracket, saving roughly $3,000 in taxes. In addition, the daughter can contribute some of that income to a Roth IRA, allowing her to start building long-term, tax-free retirement savings.

2. Hiring Your Spouse — Deductible Wages & Retirement Benefits
   
   Your spouse can be an asset both in business and in tax planning. Hiring your spouse allows you to:

• Deduct their wages as a business expense
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• Provide tax-deductible health insurance coverage for your spouse-employee
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• Contribute to their retirement plan, increasing your household savings

Example:
A dentist running a small dental practice hires their spouse as an office manager to oversee scheduling, billing, and patient relations. The practice can deduct the spouse’s reasonable salary, contribute to a 401(k) plan on their behalf, and possibly extend health insurance coverage to both spouses through the business. This setup not only reduces taxable income but also builds retirement benefits — a strategy many Dentist CPAs and Dental Business CPAs recommend when structured properly.

However, be aware: if you run a corporation (C or S corp), both wages and payroll taxes must be handled as they would for any other employee.

⚠️ The Pitfalls to Watch Out For

While hiring family members can reduce taxes, it can also raise red flags if done improperly.

1. No “Paper Trail,” No Deduction
   The IRS expects all employment relationships — even with family — to be well-documented.
   That means:

• A clear job description
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• Reasonable wages for real work performed
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• Proper time sheets, pay stubs, and payroll tax filings

Paying a child for “helping out” without documentation could lead to the IRS disallowing the deduction and assessing back taxes or penalties.

2. Unreasonable Compensation
   Family members must be paid fair market value for their work. Overpaying your spouse or child to reduce taxable income could trigger an IRS audit.

Example:
An Amazon Business owner employs their college-age son to handle part-time data entry and product descriptions, paying him $60,000 for the year. However, if the fair market rate for similar part-time work is around $20,000, the IRS could disallow the excess $40,000 as an unreasonable deduction. This illustrates the importance of paying family members reasonable compensation that reflects actual duties and hours worked — a key point often emphasized by Amazon Business CPAs and Online Commerce CPAs.

3. Misclassification
   Sometimes business owners try to treat family members as “independent contractors” to avoid payroll taxes. However, if you control their work, schedule, and pay, the IRS likely considers them employees, and you must withhold and pay appropriate taxes.

🧾 Advanced Planning for Professionals & High-Income Earners

For high net worth individuals, medical practices, and online businesses, hiring family can also open up strategic retirement and estate planning opportunities.

Example:
A married couple, both doctors, jointly operate a medical practice in Los Angeles. They employ their two adult children — one as a receptionist and the other as an IT coordinator.

• The practice deducts both children’s salaries as business expenses.
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• Each child uses earned income to contribute to a Roth IRA, creating future tax-free growth.
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• The parents successfully reduce their overall taxable income, effectively keeping more money within the family structure.

This arrangement can be highly effective for CPAs for Doctors and Medical Practice CPAs when implemented with proper documentation, payroll records, and professional oversight.

⚖️ Final Thoughts

Hiring family members can be one of the most effective tax planning tools available to small business owners — but it must be done correctly. From payroll setup to documentation and deduction tracking, a professional CPA can help ensure you receive all the benefits while staying compliant with IRS rules.

At Velin & Associates, Inc., we specialize in helping business owners — from YouTubers and online creators to dentists, doctors, and Amazon sellers — build smart, tax-efficient family employment structures that keep more income in the family.

For more information about our tax planning services, contact us today: visit our website.

Velin & Associates, Inc

8159 Santa Monica Blvd STE 198/200 West Hollywood, CA 90046
323-902-1000
dmitriy@losangelescpa.org

💬 Thinking of hiring your spouse or child? Let our CPAs help you do it the right way — and save on taxes while keeping your business compliant.CPA for YouTubers | CPA for Shopify Store | CPA for Online Commerce | CPA for Creators | Shopify Store CPA | CPA for Filmmakers | CPA for Amazon Business | Amazon Business CPA | CPA for Dental Practice | Dentist CPA | Dental Business CPA | Online Commerce CPA | CPA for TikTokers | CPA for Doctors | CPA for Medical Practice | CPA for High Net Worth Individuals