Why Paying Your Family Could Be Your Smartest (and Legal) Tax Move Yet

Imagine turning family time into real tax savings. That’s exactly what Alex, a small business owner, did — and you can too.

When Alex launched his own business, he knew every dollar counted. But when tax season rolled around, he realized the government was taking a bigger slice of his profits than he was comfortable with. That’s when he discovered a strategy that felt almost too good to be true: paying family members legitimately for work they perform, shifting income to lower tax brackets, and saving thousands.

Let’s break down how this works — and why hiring your spouse, parents, or even adult children could be one of the smartest financial moves you make this year.

The Strategy: Shifting Income and Slashing Taxes

If you have family members helping out with your business — think bookkeeping, marketing, admin tasks, or customer service — you can pay them a reasonable wage. Instead of handing them money as a gift (which is not tax-deductible), their wages become a business expense that reduces your taxable income. At the same time, you shift income from your higher tax bracket to their lower one, potentially lowering the total tax paid by your family.

Example: Alex paid his wife Jordan $30,000 and his father Sam $25,000 for legitimate work. By doing so, Alex reduced his own taxable income by $55,000, while Jordan and Sam, being in lower tax brackets, paid less in taxes on the wages they earned.

Why It Works: The Tax Treatment Basics

Key points you need to know:

  • Spouses you hire are subject to regular income taxes, Social Security, and Medicare taxes — but are not subject to Federal Unemployment Tax (FUTA) if your business is a sole proprietorship.
  • Parents you employ are also exempt from FUTA, but their wages are still subject to income tax withholding, Social Security, and Medicare.
  • Retirement Plan Opportunity: If your business offers a 401(k) plan, your spouse may also participate, allowing your family to boost retirement savings in a tax-advantaged way.

Real Numbers: How Much You Could Save

If you shift $55,000 to family members:

  • FICA Taxes (Social Security + Medicare) total about $4,207.
  • Income tax savings will depend on your family members’ filing status, but if they are in a lower tax bracket, the overall savings could be substantial.

Without this strategy, you might be taxed at 35% or more. With income shifting, much of the transferred income could be taxed at 12% or even less. This can mean thousands of dollars in savings every single year.

Important Rules to Follow

To make sure the IRS views this favorably, be sure to:

  • Document the work performed: Family members must be doing real work that benefits the business.
  • Pay reasonable wages: Compensation must be similar to what you would pay a non-family employee.
  • Maintain clear records: Timesheets, job descriptions, and payroll records are critical in case of an audit.

Treat your family members just like you would treat any other employee.

More Than Just Tax Savings

Hiring family members for legitimate work does more than just reduce taxes. It allows you to:

  • Provide legitimate, earned income to family members who may need it.
  • Build greater financial security by allowing them to contribute to retirement plans.
  • Strengthen your business with trusted and capable people.

Final Thoughts

Smart business owners are using this strategy now to reduce their 2025 tax bill — and you still have plenty of time to set it up. Since it requires that the work and payments happen within the same calendar year, getting started by mid-year is ideal. Waiting until December often leads to rushed documentation and missed opportunities.

If you think hiring a family member could be a good fit for your business, now is the time to plan carefully and set it up properly. Always consult with a knowledgeable tax professional to ensure you meet all legal requirements and maximize your tax benefits.