Hiring Family Members / Family Employment Tax Planning: The Tax Benefits Depend on Real Work, Reasonable Pay, and the Entity Paying the Wages

Hiring a spouse, child or other family member can shift income, create earned income and support retirement savings—but only when the family member performs real work for reasonable pay and payroll treatment matches the entity and relationship.

The job must be real

Define duties, hours, supervision and expected output. Compensation should be reasonable for the services, not selected simply to move income into a lower bracket.

Payroll-tax exceptions are relationship and entity specific

Special FICA and FUTA rules can apply when a child works for a parent’s sole proprietorship or a partnership owned only by the parents. Those exceptions generally do not carry over simply because the parents own a corporation.

A spouse or parent has different rules

Family-member employment provisions distinguish children, spouses and parents. Apply the correct relationship and employer-entity rule rather than using a “family payroll” shortcut.

Earned income can create downstream planning opportunities

Legitimate wages can support IRA contributions and other employee benefits, subject to eligibility rules. The tax benefit should follow the employment—not create fictitious employment.

Labor law still matters

Federal and state child-labor, workers’ compensation, unemployment and wage rules can apply. The tax practitioner should identify those implementation issues and coordinate with payroll or legal specialists as needed.