Family Payroll Planning: Should You Pay Wages or Give Gifts?

Many business owners want to support family members financially — whether it’s helping a child in college, giving a spouse income, or hiring a teen for summer work. The big question is: should that money come in the form of wages or gifts?

On the surface, it may feel like the same thing. Either way, you’re moving money from your pocket to theirs. But for tax purposes, the difference between paying wages and giving gifts can be dramatic. The wrong choice could mean paying unnecessary taxes, while the right one can help you reduce your overall tax bill.

🎁 The Gift Route

If you give money as a gift, the IRS allows each individual to give up to $18,000 per year (2024 limit) to any number of people without triggering gift tax reporting. Married couples can combine their limits, meaning parents together can give a child up to $36,000 per year.

For the recipient, gifts are generally tax-free. They don’t need to report the money as income, and you don’t get a deduction for giving it. It’s simply treated as a transfer of wealth.

When gifts make sense:

• You want to keep things simple.

• The recipient isn’t performing work for your business.

• You’re using gifts as part of estate planning to gradually transfer wealth.

But remember: Gifts don’t reduce your business’s taxable income. If your goal is both generosity and tax savings, wages may be the better route.

💼 The Wages Route

Paying wages is different because it involves treating the family member like an employee. If they actually perform work for your business — even part-time or seasonal — you can pay them a reasonable wage.

For your business, those wages are deductible as an expense. That means every dollar you pay reduces your taxable income. For example, paying your child $10,000 to work in your firm could save your business several thousand dollars in taxes, depending on your tax rate.

For the family member, wages are taxable income, but at their (often lower) tax bracket. Many children or college students can earn thousands before owing any federal income tax, making this an efficient way to shift income from a higher-bracket parent to a lower-bracket child.

When wages make sense:

• The family member actually works in your business (even simple tasks like filing, scanning, or marketing support).

• You want to reduce your business’s taxable income.

• You’re interested in helping your child earn income for retirement contributions (like opening a Roth IRA).

Caution: To stay compliant, wages must be reasonable for the work performed, properly documented, and paid through payroll just like any other employee.

⚖️ The Right Balance

So, should you pay wages or give gifts? The answer depends on your goals:

• If your primary goal is wealth transfer with no strings attached, gifts may be best.

• If your goal is tax savings for the business and income-shifting to family members in lower brackets, wages are often more effective.

• Some families do both: pay wages for legitimate work and give gifts at year-end for personal support.

The Lucrum Bottom Line

Family payroll planning isn’t just about generosity — it’s about strategy. With the right approach, you can support your loved ones and reduce your taxes at the same time.

At Lucrum Legal Accounting™, we specialize in guiding attorneys and entrepreneurs through these kinds of decisions. From setting up compliant payroll for family members to designing tax-smart gifting strategies, we’ll help you find the balance that works best for your family and your firm.

Thinking about paying wages or giving gifts to your family this year? Let’s talk before you cut the check. The right plan can make a big difference in your tax bill.