Should You Add Family Members to Your Company’s Payroll?

Running a family-owned business often means blending professional goals with personal values. One common question we hear from entrepreneurs is: “Should I put my spouse, children, or other family members on payroll?”

The answer is: it depends. Done correctly, hiring family members can provide tax advantages, financial support, and succession planning benefits. But if handled incorrectly, it can raise red flags with the IRS or create complications for your business.

At Lucrum Legal Accounting, we help business owners make smart, compliant payroll decisions. Here’s what you should know.

1. Tax Benefits of Hiring Family Members

• Income Shifting: Paying wages to your children may allow income to be taxed at their lower rate rather than yours.

• Retirement Contributions: Family members on payroll can participate in retirement plans, helping grow long-term wealth.

• Business Deductions: Wages paid are deductible business expenses—just as they would be for any other employee.

2. Rules You Must Follow

The IRS expects family employment to be legitimate, not just a way to reduce taxes. To stay compliant:

• The job must be real. Family members should perform actual, necessary work for the business.

• Pay must be reasonable. Wages should reflect the market value for the services performed.

• Proper documentation is required. Time sheets, job descriptions, and W-2s should be maintained like with any employee.

Failing to follow these rules can result in penalties, back taxes, and unnecessary IRS scrutiny.

3. Special Considerations by Relationship

Spouse: Hiring your spouse may open access to retirement benefits and health insurance coverage, but you must withhold and remit payroll taxes appropriately.

Children:

• Under 18 years old: Wages paid by a parent-owned sole proprietorship (or partnership with both parents) are exempt from Social Security and Medicare taxes.

• Under 21 years old: Wages are exempt from Federal Unemployment Tax (FUTA)

  This creates significant savings while teaching children valuable work experience.

Parents or Other Relatives: Parents can be hired like any other employee, but no special payroll exemptions typically apply. Proper withholding and reporting are required.

4. Potential Pitfalls

While there are benefits, there are also challenges:

• Blurring family and business boundaries can create tension.

• Overpaying family members raises IRS audit risks.

• Failing to treat family like “real” employees undermines credibility and compliance.

Final Thoughts

Adding family members to payroll can be a powerful tool for tax savings, retirement planning, and succession building—but only when done carefully.

At Lucrum Legal Accounting, we guide business owners through the process with an eye on compliance, strategy, and maximizing benefits. If you’re considering putting a spouse, child, or parent on your payroll, let’s make sure it’s done right.

👉 Contact us today to explore whether family payroll could be a smart move for your business.