Hiring Family: 4 Keys Connecticut Business Owners Should Know
“We must teach our children how to dream with their eyes open.” – Harry Edwards
If you’re looking to expand your team this year, allow me to offer some advice on doing it the tax-smart way, because if you hire a certain kind of employee, you could score some significant savings.
Which kind?
I’ll give you a hint: They share your last name. And they’re probably the few who have seen you in your post-Thanksgiving comatose state.
So, before I explain the nitty gritty of hiring family members (and for today’s purposes, I’m speaking primarily about your children), let’s take a look at the benefits involved…
The perks
There are two main benefits to hiring family members (more specifically, your children):
- For any family members you hire, their wages are deductible as a legitimate business expense (which helps reduce your self-employment or corporate tax liability).
- Specifically related to hiring dependents, it shifts income from your higher personal marginal tax bracket to their lower one, because the wages you pay your child are income tax-free for the child if they’re under the standard deduction.
The standard deduction for a dependent is the greater of either $1,350 or their earned income plus $450, but not more than the regular standard deduction for their filing status, which is $15K for single filers in 2025.
Meaning, if your child is your dependent and has very little earned income from your business but significant unearned income (like from investments), their standard deduction could be much lower than the full $15K.
And be aware that if their wages exceed the standard deduction, the child will owe federal income tax on the excess.
Another bonus for certain business owners: You don’t have to withhold or pay Social Security or Medicare (FICA) taxes on your child’s wages IF…
– They’re under 18.
– You’re operating as a sole proprietorship or a partnership where both partners are the child’s parents.
Note: This bonus does not apply if you own an S-corp, C-corp, an estate, or a non-parent partnership. In those cases, you have to withhold and pay both the employee and employer portions of FICA taxes from dollar one, regardless of your child’s age.
Sole proprietorships and parent partnerships also don’t pay federal unemployment taxes (FUTA) on wages if your child is under 21, but while they’re younger, those savings add up.
(The same limitations apply here: If your business is an S-corp, C-corp, or a non-family partnership, you’re still on the hook for FUTA taxes. And for LLCs, it depends on how your LLC is taxed – Single-member LLCs taxed as sole proprietorships and multi-member LLCs taxed as partnerships qualify for these bonuses, but those taxed as S-corps or C-corps don’t.)
Rules of the road
Now, the IRS does have some guidelines about hiring family that you’ll need to follow. If they think you’re not playing by the rules, they can disallow your deduction. To avoid this, make sure you…
1. Give your child real, age-appropriate work. The IRS requires that your child perform bona fide work that is ordinary and necessary to your trade or business. Also, their tasks should be the same as is reasonably expected of anyone else in the same role.
In addition, their work has to benefit the business (not the household). That means no lawn mowing, babysitting siblings, or doing your grocery run. Even if it “frees you up” to work more in your business.
Duties like filing, stuffing mailers, assembling kits, cleaning the storefront, taking inventory, and helping with social media, as examples, are all viable, depending on the age of your child, of course.
(Note that there’s no IRS minimum age requirement. But in audit history, age 7 is generally the earliest the IRS accepts employment in court cases.)
2. Pay reasonable wages. Yes, you want to pay your child as much as you can (within the boundaries of the standard deduction) to maximize the tax benefit. But if you’d pay a high school intern $13 per hour to do spreadsheet cleanup, don’t pay your 14-year-old more for the same task. Excessive compensation flags IRS suspicion.
Use fair market wages as a benchmark – what would you pay a non-family employee to do the same job?
Also, check with your state’s regulations here – federal child labor laws don’t require minimum wage for children working for their parents in a non-hazardous business, but your state might.
3. Treat them like any other employee. This is a real employee-employer relationship, so all the same compliance steps apply.
Pay your child via check/direct deposit from a business account (not cash) on a proper pay schedule, and do all the same paperwork: Filling out a W-4, completing Form I-9, making sure they have a Social Security number, issuing a W-2 at year-end (even if you’re exempt from certain taxes, like I explained earlier).
4. Keep good records. This is where an audit is won or lost. The IRS needs to see that wages paid to your child were 1) for legitimate business work, 2) properly timed and recorded, and 3) in amounts tied to work performed.
So, meticulously log the hours your child works and the kind of work they perform. Create a timesheet or add them to your time tracking software. I always recommend my clients write up a short employment agreement outlining duties, expectations, and schedule. And, store copies of their paystubs, W-2s, and any training materials or onboarding steps you had them do.
This isn’t just good practice, it’s evidence. The kind the IRS can’t argue with.
If you do this sloppily, hiring family members in your business is an audit magnet. Hiring a family member, especially your own child, should be a move that boosts your production and your bottom line, not one that causes more headaches.
So, if you’re thinking of bringing your kin into your Connecticut business, these guidelines will get you started. But if you want help figuring out if this move makes good business and personal tax sense for you, let’s get something on the calendar to talk that over:
calendly.com/bhta-mm/meeting