Podcast: Hiring Family to Maximize Your Businesses Tax Savings

Hiring Family Members

Written by Jeff Dvorachek

February 9, 2023

In these 5 minutes, Jeff Dvorachek, a tax partner, explores the various ways hiring a child; or spouse can maximize the tax savings of a family-owned business.

Hiring your spouse and children in your business can provide a lot of tax benefits. But there are more than just tax benefits to doing this.

What are the advantages of hiring family members and putting them on payroll?

  1. Move income into a lower tax bracket
  2. Family member can contribute to a retirement plan (IRA)
  3. Funds can be used to pay for expenses or school

Let’s start by talking about moving the income into a lower tax bracket.

  • As most people know there are eight different tax brackets ranging from 0% to 37% (which may become 39.6%)
  • So hiring your child works well for parents in a higher bracket (32-35-37%)
  • Let’s say that you pay your child $5,000, $10,000 or up to around $12,000, their tax bracket is 0%.
  • Depending on the type of business, family member may need to pay Social Security and Medicare taxes, but the family could save $2,100 for every $10,000 of salary.

Then you mentioned retirement plans?

  • This works well for spouses. You can pay your spouse $5k, $10k or even $20k.
  • Then depending on the type of retirement plan, this income can get contributed to a retirement plan.
  • Works the same way we talked about with children before – it allows for that income to be tax free for federal and state – all you need to do is pay Social Security and Medicare.
  • Once again, the tax savings could be $2k for each $10k contributed to retirement plans.

For a child, they can make a Roth IRA contribution, right?

  • Makes it even better since as long as they have earned income, they can contribute to a Roth IRA
  • No tax deduction – but not needed
  • Grows tax free.
  • Can take contributions out to pay for anything – including college

Speaking of school, can the business pay for a child’s education?

  • Yes, but it is very complicated and the circumstances have to be just right.
  • What I would do is to hire your child and set the funds aside to pay for college.
  • Takes a little planning, but can be done.

Lastly, can a child be paid any amount?

  • Yes, but the wages have to be justified for the amount of work that they do.
  • Can’t pay them to do nothing.
  • Get a work permit if required.
  • Keep a timesheet
  • Have an accurate job description

Be sure to talk to one of our professionals if you have any questions regarding hiring family members.

Contact Us

Share This Article
Jeff Dvorachek
I joined Hawkins Ash CPAs in 1998. I am the partner-in-charge of the Manitowoc, WI, office and tax director for the firm. I have thorough experience providing tax services to individuals, commercial businesses, nonprofit entities and estates and trusts. I also provide compilation and review services. I lead the Tax Committee and am a member of the Information Technology Advisory Committee.

GET connected. STAY connected.

Read More Like This