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Valor Tax Relief Team
Professional Tax Resolution Specialists
Overview
Hiring family can be smart for trust and flexibility—and it can unlock legitimate tax savings. But the rules differ by relationship, age, and business entity. Get them wrong and you risk payroll penalties or disallowed deductions. This guide shows what changes in 2025 matter, how to structure pay correctly, and which records keep you compliant.
If you’re juggling past balances while paying family, consider a payment plan or Offer in Compromise so compliance and cash flow stay on track.
Why Owners Hire Family
Trust & Reliability
Family often adapts quickly, protects confidentiality, and covers last‑minute needs.
Flexibility & Shared Goals
Scheduling is easier and incentives align with the company’s long‑term success.
Household Support
Payroll can fund retirement for young workers and support spouses or parents.
Tax Advantages
Income Shifting
Paying reasonable wages to family for real work can shift income into lower brackets. Coordinate with the right IRS forms and payroll setup.
Payroll Tax Savings (Minors)
In a sole proprietorship or parent‑only partnership: under 18 are exempt from FICA; under 21 may be exempt from FUTA. Corporations do not qualify.
Deductible Wages & Benefits
Reasonable wages for necessary services are deductible. Benefits like retirement and health plans may be deductible when offered under plan rules and applied consistently.
Tax Drawbacks & Risks
- Outside minor‑child exemptions, standard payroll taxes (FICA/FUTA) apply.
- Wages must be reasonable and reflect actual work—or deductions risk disallowance.
- Full compliance burden: W‑4, I‑9, timesheets, payroll deposits, and filings.
- Entity limits: S/C corps can’t use minor‑child exemptions; partnerships with non‑parent partners don’t qualify.
Rules by Relationship
Minor Children
- Real, age‑appropriate work only
- Reasonable market wages
- SP/parent‑only partnership: FICA exempt < 18; FUTA exempt < 21
- Track hours and deliverables
Spouses
- Standard payroll taxes generally apply
- Benefits can be valuable (retirement/health)
- Documentation same as any employee
Adult Children & Parents
- Standard payroll taxes
- Reasonable compensation critical
- Consider workload vs. wage evidence
Entity Rules That Change the Math
| Entity | Minor‑Child Payroll Exemptions | Notes |
|---|---|---|
| Sole Proprietorship | FICA < 18; FUTA < 21 | Child must work for parent’s business; proper records required |
| Parent‑Only Partnership | Similar to SP | All partners must be parents of the child |
| S Corp / C Corp | No | Standard payroll taxes; consider other planning |
Compliance Checklist
- Written job description and market‑based wage
- I‑9 and W‑4 completed; state forms if required
- Time tracking and proof of work performed
- Proper payroll setup (deposits, returns, W‑2)
- Child labor and state rules verified
- Benefit eligibility consistent with plan terms
- Year‑end reviews for reasonableness
- Consider Audit Representation if notices arrive
Common Mistakes to Avoid
Misclassification
Calling family “contractors” to skip payroll usually backfires.
Overpaying
Unreasonable wages are a top audit trigger and can be disallowed.
No Records
Missing timesheets, duties, or proof of work undermines deductions.
Ignoring Entity Rules
Corp owners can’t use minor‑child exemptions; plan accordingly.
Frequently Asked Questions
Can I pay family from my LLC?
Yes. Payroll taxes generally apply unless your LLC is taxed as a sole proprietorship or parent‑only partnership employing a minor child. Confirm your tax classification before relying on exemptions.
How do I pay family members properly?
Use payroll with W‑2s, withholdings, and deposits like any employee. Keep job descriptions, timesheets, and proof of work. See our services overview if you need setup help.
What about the kiddie tax?
Kiddie tax targets unearned income (interest/dividends) of children. Wages for real work are earned income and not subject to kiddie tax rules.
How much can kids earn tax‑free in 2025?
A dependent’s standard deduction shelters up to $15,750 of earned income in 2025. Payroll taxes may still apply depending on your entity and the worker’s age.
Can I pay my child in cash from my company?
Avoid cash. Run all wages through payroll with proper withholdings and documentation (W‑2, timesheets, proof of work) to preserve deductions and avoid IRS issues.
Want a Compliant Family Payroll Plan?
We’ll structure roles, document wages, and align your entity strategy. If you already owe, we can pair it with Back Tax Relief.
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