Wealth in the Family: Strategies for Employing Relatives and Saving Big
Advanced tactics, fresh examples, and expert tips to transform family expenses into tax deductions
Hello, Dear Entrepreneur!
Are you looking for new ways to keep more of what you earn—and help your family in the process? In this article, you’ll learn advanced tactics, fresh examples, and expert tips for transforming family-related expenses into legitimate tax deductions.
Tax-savvy entrepreneurs have long recognized the power of legitimately and strategically paying family members—from young children to adult children and even grandchildren—to build long—term wealth. With 2025 on the horizon, it’s more important to grasp the detailed mechanics of structuring these arrangements to optimize income tax and payroll tax savings.
Below is a comprehensive exploration of how and why to pay family members, with additional nuances, new examples, and tips for enhancing your tax strategy.
1. High-Level Benefits of Putting Family on the Payroll
1.1. Income Shifting to Lower Brackets
By employing or contracting with your relatives, you shift income from your higher bracket to theirs. In 2025, the federal standard deduction for a single filer is expected to be roughly $15,600 (though final inflation adjustments may vary). This means each individual can earn up to that amount of earned income tax-free at the federal level—an excellent way to minimize overall family taxes.
1.2. Reduced Payroll Tax for Under-18 Children
A key advantage of having children under the age of 18 work for a sole proprietorship (or a partnership comprised solely of parents) is the exemption from Social Security and Medicare (FICA) taxes. This can be substantial for families that pay thousands of dollars in wages each year.
1.3. Legitimate Business Expense
When done correctly (i.e., the child is genuinely performing age-appropriate tasks and you keep records of the hours and duties), the wages or compensation paid to your relative is a deductible business expense. Far better to buy your teenager’s laptop or college textbooks with pre-tax dollars—in effect—than to pay for it out of your after-tax personal funds.
1.4. Wealth-Building Tools
Roth IRA Contributions: If your child has earned income, you could help them (or encourage them) to fund a Roth IRA, setting them up for decades of tax-free growth.
Credit Building: Many kids or young adults can start building a credit profile by receiving a steady paycheck, opening a bank account, and responsibly using a credit card.
2. Employing Under-18 Children: Zero FICA Advantage
2.1. Preferred Entities
Sole Proprietorship (Schedule C): Generally the most straightforward structure for paying under-18 children.
Partnership (owned only by parents): Works similarly to a sole prop for the children’s wages (no FICA required).
S Corp or C Corp: Directly paying under-18 children triggers normal employment tax rules, so you lose the FICA exemption. However, you can route money from your corporation to a family management company (a sole proprietorship or partnership) and pay children from there.
Suppose you own “XYZ Designs, Inc.,” an S corporation for your main business. In 2025, you want to pay your 16-year-old child $12,000 for genuine work—helping with social media, inventory organization, or client scheduling.
XYZ Designs issues a management fee—say $12,000—directly to your separate Schedule C “Family Management” business.
The Family Management entity pays your child $12,000 as outside labor (no W-2 or 1099 required if it’s your own child in a sole prop).
The child’s standard deduction covers the $12,000 of wages, meaning they pay $0 in federal income tax.
You effectively shifted $12,000 of profit from your S corp into a 0% bracket.
2.3. Documentation Essentials
Timesheets or Work Logs: Note dates, hours worked, and tasks performed.
Bank Transfers: Keep a clear record of each payment, e.g., from your sole prop account to your child’s checking account.
Reasonable Pay: Avoid paying $25,000 for minimal duties. If questioned, the IRS will expect wage rates to be in line with local norms for similar tasks.
3. Employing 18 and Older Children: W-2 vs. 1099
When your child turns 18, you lose the FICA exemption (if you’re a sole prop or partnership). From this point forward, you need to decide whether they are employees or independent contractors, just like any adult worker.
3.1. W-2 Employee
If your adult child works on a set schedule in your office or store, uses your equipment, and essentially functions like any other employee, you should treat them as a W-2 worker.
You will withhold Social Security and Medicare, along with any applicable federal and state income taxes.
Nonetheless, you still shift income to your child’s lower tax bracket, and you still get a valid deduction.
3.2. 1099-NEC Contractor
If your adult child sets their hours, uses their resources or equipment, and completes project-based tasks, they may qualify as a 1099 contractor.
They will owe self-employment taxes on their net profit. However, they can offset those earnings with legitimate business expenses (e.g., a laptop, home office costs, etc.).
Example: College Property Manager
You own a rental property in your child’s college town, held in an LLC.
Your 19-year-old child oversees tenant screening, minor repairs, and rent collection as a part-time job.
You pay them via 1099-NEC for property management services.
They deduct mileage, cell phone expenses, or other out-of-pocket costs on their own Schedule C, reducing self-employment tax.
The LLC takes a full deduction for management fees on Schedule E.
4. Going Beyond Wages: Advanced Tax-Wise Ideas
4.1. Funding a Roth IRA
If your child earns wages or 1099 income of, say, $6,000 or more, they could contribute up to the annual Roth IRA limit (subject to overall IRS rules, which may be around $7,000 by 2025 for those under age 50). Over time, compounding in a Roth IRA can be extraordinarily powerful.
4.2. Hiring Grandchildren
Grandparents can similarly employ grandchildren under 18 through a sole prop or grandparent-only partnership and qualify for the same no-FICA advantage. This can be a way to:
Transfer wealth more effectively,
Teach work ethic, and
Provide tax-favored income to grandchildren.
4.3. Paying in Equity or Profit-Sharing
For older children or relatives (like adult siblings) who may want a stake in the business, you could explore awarding a minor equity interest (e.g., in a new LLC) in place of some wages. Be sure to consult a professional for pitfalls such as partnership allocations, securities laws (in rare cases), and exit strategies if they lose interest.
4.4. Combining a 401(k) Plan
If your business (S corp, C corp, or even certain LLCs) offers a qualified 401(k), consider the benefits of having your over-18 child as an employee who can contribute to the plan, with the company offering a modest match. This could be a jump start on retirement savings, though it must comply with standard ERISA rules and nondiscrimination testing.
4.5. Employing Children Under 5
Though uncommon, young children can legitimately be compensated for certain business-related tasks (e.g., modeling in advertisements for a pediatric dentist or children’s clothing line). Keep a file of marketing photos, advertisements, or promotional materials that substantiate their involvement as a real (not fabricated) business role.
5. Important Compliance Steps
Separate Bank Accounts: Never combine personal and business funds. Your children or relatives should have individual accounts to receive wages or contractor payments.
Signed Contracts: For older kids under a 1099 arrangement, consider a simple independent contractor agreement to define scope and pay rate.
Payroll System or Ledger: For under-18 wages out of a sole prop, maintain an internal ledger or payroll system. For W-2 employees, use a reputable payroll service.
Year-End Forms:
If a child is a true W-2 employee (18+), issue a Form W-2.
If they’re a legitimate 1099 contractor (18+), issue a Form 1099-NEC if payments exceed $600.
Under-18 children in a sole prop or parent-only partnership arrangement do not require a W-2 or 1099 but keep good records nonetheless.
Reasonable Pay and Duties: The IRS expects compensation to be in line with local market rates and tasks that match your child’s age/skill set. Paying your 7-year-old $1,000 per week for “filing” is unwise if you can’t substantiate it.
6. More In-Depth Examples
6.1. Rural Farming Family
A couple owns a small farm as a Schedule F (similar tax treatment to Schedule C, but specifically for farming).
Their 17-year-old helps with harvesting, equipment cleaning, and farmers’ market sales.
The parents pay the child $10,000 in 2025. Because it’s a sole-prop-type setup, no FICA taxes apply for the under-18 child. The child also stays under the approximate $15,600 standard deduction—thus owing $0 federal tax.
6.2. Tech Startup & the College Grad
You run a tech startup (S corp) and your 22-year-old, a computer science major, consults on web development.
Their tasks are project-based, they use their software tools, and they set their hours—so they qualify as a 1099 contractor.
You pay them $25,000 in 2025. They track legitimate tech expenses (laptop depreciation, specialized software) that reduce their net self-employment income.
You get a business deduction on your S corp; they pay a manageable amount in self-employment tax, and likely remain in a lower overall bracket than you would have faced if you kept that $25,000 in corporate profits (passed through to you personally).
6.3. Grandparent-Grandchild Summer Job
A grandparent with a single-member LLC (disregarded entity, treated like a sole prop) hires a 16-year-old grandchild for the summer to help with administrative tasks (mailers, basic bookkeeping, scanning documents).
The grandchild is paid $5,000 in total—no FICA is required because they’re under 18 and working for a sole prop that the grandparent wholly owns.
The grandchild’s standard deduction covers $5,000 in wages, so no federal income tax. The grandparent has a $5,000 deduction on Schedule C.
7. Health Insurance Angle and Other Fringe Benefits
With ACA Marketplace coverage, children who earn enough income might qualify for their subsidized policy. This can reduce a family’s total health insurance premiums—particularly beneficial if you’re used to paying high group insurance rates for older dependents. Make sure they meet the income and state residency guidelines for any marketplace plan.
Additionally, legitimate employees in your business may be eligible for other standard benefits such as accident insurance, transportation fringe benefits, etc.
8. Watch-Outs and Pitfalls
Overpaying: The IRS could disallow wages significantly above market rates for the services rendered.
Lack of Documentation: Failing to maintain thorough records invites scrutiny.
Ownership Changes: If you bring outside partners into your LLC or partnership, the FICA exemption for under-18 children can be lost.
Kiddie Tax (on Unearned Income): This usually doesn’t apply to earned income from wages or self-employment—only to unearned income (e.g., dividends, interest). Still, keep it in mind if your children or grandchildren also have investments.
Position Your Family for 2025 Success
Paying relatives—especially children—through your business is one of the most impactful ways to legally reduce overall family taxes. The income shifting, payroll tax exemptions for younger teens, real-life financial education, and potential for retirement savings all make this strategy a cornerstone of advanced tax planning.
Action Steps:
Determine which business entity (sole prop, partnership, S corp, or C corp) will handle payments to under-18 children.
For adult relatives, decide between a W-2 employment or 1099 contract arrangement, backed by a clear job description.
Keep extensive records: hours, pay rates, tasks, and a tidy audit trail of money movement.
Explore advanced options like Roth IRAs, health insurance savings, and fringe benefits to maximize benefits.
When done properly, these methods can significantly reduce the family’s collective tax burden while transferring valuable skills, responsibility, and seed capital to the next generation—often setting them up for lifelong financial success.
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