Understanding the Family Employment Tax Exemption
Thinking about hiring your spouse? Your teenager? Maybe even your parents?
You’re not alone.
A lot of small business owners bring family members into the fold—and honestly, it makes sense. There’s trust, flexibility, and shared goals.
But here’s the real question…
Can you actually save money on taxes by hiring them?
The short answer? Yes—but only if you follow very specific IRS rules.
The long answer? Well, that’s what we’re diving into today.
Because while the IRS does offer tax exemptions for family members, most business owners miss out.
Either they don’t know these benefits exist…
Or they’re too overwhelmed by all the fine print to take action.
That confusion can cost you thousands in missed deductions.
So let’s break it all down, what hiring your family can really do for your taxes.
How the Family Employment Tax Exemption Can Save You Money
Here’s what we’re covering today:
- • Tax breaks for hiring your child
- • What happens when you hire your spouse
- • The rules around hiring your parents
Let’s go one by one.
Hiring Your Child
Hiring your child, especially if they’re under 18, can be a major tax benefit.
If you run a sole proprietorship or an LLC taxed as a sole proprietorship, you might be able to:
- ✅ Skip paying FICA taxes (Social Security and Medicare)
- ✅ Avoid FUTA tax (Federal Unemployment)
- ✅ Still deduct their wages like any other employee
Let’s say you pay your 15-year-old $10,000 a year to help with admin tasks, marketing, or product fulfillment.
As long as the job is real and the pay is reasonable for the work? You could write off the entire amount and your child might not even owe federal income tax if it’s under the standard deduction.
No payroll tax. No income tax. Full write-off.
Once they turn 18, though? Everything changes.
You’ll need to withhold and pay payroll taxes just like you would for any other employee.
⚠️ Heads-up for California and a few other states—you might still have to pay SUI (State Unemployment Insurance) even if the IRS doesn’t require FUTA. Always check your state’s rules.
Hiring Your Spouse
Here’s where a lot of business owners get tripped up.
They think hiring their spouse means huge tax savings, but that’s not always true.
If you hire your spouse as an employee:
- • You still have to pay FICA taxes (that’s 15.3% on wages)
- • You might be exempt from FUTA taxes if you’re a sole prop
- • You can deduct their wages like any other employee
Example: You pay your spouse $100,000/year. That’s $15,300 you owe in payroll taxes. Oof.
So is it still worth it?
Maybe. If your spouse is doing real work in your business and you want to contribute to their retirement accounts or health benefits, this setup could still be valuable.
But you’re not getting a “free pass” on taxes here.
Hiring Your Parents
This one’s a bit different.
If you’re a sole proprietor and hire your parent, you don’t have to pay FUTA taxes.
That’s it. That’s the main benefit.
They’re not exempt from FICA, and you still need to follow all the regular payroll rules.
You can still deduct their wages. But that applies to any family member you hire be it cousins, nieces, nephews, in-laws, etc.
Family Employment Tax Exemption Chart
| Family Member | FICA | FUTA | Wages Deductible |
|---|---|---|---|
| Child under 18 | ❌ No | ❌ No | ✅ Yes |
| Child 18+ | ✅ Yes | ✅ Yes | ✅ Yes |
| Spouse (Sole Prop) | ✅ Yes | ❌ No | ✅ Yes |
| Spouse (Other) | ✅ Yes | ✅ Yes | ✅ Yes |
| Parent | ✅ Yes | ❌ No | ✅ Yes |
✅ = Required
❌ = Exempt
Why Hiring Family Can Still Be Worth It
Even if you don’t qualify for every tax exemption, there are non-financial reasons to keep it in the family.
For example:
- ✅ You can teach your child real-world work ethic early
- ✅ Your child can start saving for retirement with a Roth IRA
- ✅ Working with your spouse can help you build something meaningful together
- ✅ Involving your parents keeps them active and engaged in their later years
- ✅ Family trust runs deep, and that kind of loyalty is hard to hire
So even if the tax savings aren’t as beneficial, the overall ROI of hiring family? Still very real.
Final Thoughts
So, can you save money on taxes by hiring your family?
Yes… but it depends.
Kids under 18? They get the biggest tax advantage. Spouses and parents get some perks, but not as many. If you hire anyone else, you can still get the wage deduction, just not special tax treatment
The key is making sure the work is real, the wages are fair, and your payroll documentation is clean.
If you’re ready to dive deeper into family tax strategies, keep exploring our blog.
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Frequently Asked Questions (FAQ)
1. Can I really hire my own child and pay them without paying payroll taxes?
Yes—if your child is under 18 and you’re operating as a sole proprietorship or single-member LLC. In that case, you’re exempt from both FICA and FUTA taxes. Just make sure the job is legitimate and the pay is reasonable.
2. What if my child is over 18?
Once your child turns 18, you’re required to withhold and pay payroll taxes just like you would for any other employee. The tax exemptions go away, but you can still deduct their wages as a business expense.
3. Can my child’s income be tax-free for them too?
Yes—if their total annual wages stay under the standard deduction (which is $14,600 for single filers in 2025), they likely won’t owe federal income tax. But always confirm the numbers with a tax pro.
4. Do I have to pay my child minimum wage?
If your business is subject to the Fair Labor Standards Act (FLSA), then yes. But for many small businesses, especially family-run sole props, there may be exceptions. Still, their wage should reflect the actual work they’re doing.
5. Can I hire my spouse just to save on taxes?
Hiring your spouse can have some benefits—like contributing to their retirement or health benefits—but don’t expect big payroll tax breaks. You’ll still have to pay FICA taxes, and FUTA may or may not apply depending on your business structure.
6. Do I need to withhold payroll taxes for my spouse?
Yes. Even though your spouse is family, the IRS still sees them as an employee. That means you’re responsible for withholding FICA (Social Security and Medicare) unless you’re exempt from FUTA as a sole proprietor.
7. What if I hire my parents?
If you’re a sole proprietor, you’re exempt from FUTA taxes when hiring a parent. But you still have to pay FICA taxes and follow standard payroll procedures.
8. What happens if I don’t document everything properly?
Big risk. The IRS can deny your deductions, assess penalties, or even treat the arrangement as tax fraud if the work wasn’t legitimate. Keep detailed records: time sheets, job descriptions, pay stubs, and copies of payments.
9. Can I just pay my kid cash under the table?
Nope. If you’re trying to claim their wages as a deduction, everything must be run through proper payroll channels. Cash without records = no deduction + possible legal trouble.
10. Can I set up a retirement account for my child or spouse once I hire them?
Absolutely. A Roth IRA for your child or a SEP IRA or 401(k) for your spouse can be a great wealth-building tool. Wages must be documented, and the employee (aka your family member) must qualify based on income and plan rules.
11. Is there a cap on how much I can pay my child?
Not technically—but the amount must be reasonable for the work they do. You can’t pay your 10-year-old $100/hour to sweep the floor and expect the IRS to buy it.
12. What business structures qualify for family employment exemptions?
Most of the family employment tax perks (like skipping FICA and FUTA) apply only to sole proprietors or single-member LLCs taxed as sole props. If you’re an S-corp or partnership, the rules change.
