5 Tax Savings Strategies Most Business Owners Don’t Know About

Day 2: Hiring Family Members (Without Raising IRS Eyebrows)

So, you’ve structured your business for tax savings (good job!). Now, let’s talk about something most business owners overlook—hiring family members. 

So right now, you might be thinking I’ve seen this on Instagram and so I know:

• “I can hire my spouse and get some tax breaks?” ✅ Yes.

• “I can pay my kids and reduce taxable income?” ✅ Yes.

• “The IRS won’t care as long as it’s legit?” ❌ Wrong.

The IRS loves looking into businesses that hire family members. So, let’s cover how to do it the right way and avoid trouble.

Hiring Your Spouse: The Overlooked Loophole

If you operate a sole proprietorship or an LLC taxed as a sole prop, hiring your spouse can be a smart tax move.

Why? Because you don’t have to pay:

• Social Security & Medicare taxes (IRC § 3121(b)(3)(B))

• Unemployment taxes (FUTA) if the spouse is the only employee

But (and it’s a big but) you must:

✅ Pay a reasonable wage

✅ Actually have your spouse perform real work

✅ Document hours worked and duties

This isn’t just “writing a check to your spouse and calling it payroll”—the IRS won’t fall for that.

Hiring Your Kids: The Ultimate Tax Hack

If your kids are under 18, hiring them can be a goldmine for tax savings (as long as they actually do work).

✅ No Social Security & Medicare taxes if paid by a sole proprietorship or an LLC taxed as a sole prop (IRC § 3121(b)(3)(A))

✅ No federal unemployment tax (FUTA) (IRC § 3306(c)(5))

✅ Can pay them up to $14,600 tax-free in 2024 (because of the standard deduction)

Here’s how it works:

1. Your business pays your child (reasonable salary for actual work).

2. Your business deducts the wages as a business expense (reducing taxable income).

3. Your child doesn’t pay federal income tax (as long as they stay under $14,600).

4. That money can go into a ROTH IRA for tax-free growth—huge long-term benefit.

BUT BE WARNED: The IRS hates when people abuse this. They will ask:

❌ “Is the child doing actual work?”

❌ “Is their salary reasonable for their age and skills?”

❌ “Is there documentation (timesheets, W-2s)?”

If your 8-year-old is supposedly “handling customer service calls” or “doing bookkeeping,” expect a nasty audit. But if they’re actually doing things like social media, cleaning, organizing inventory, or assisting with admin work, you’re in the clear.

Tomorrow’s Topic: Retirement Plans for Small Business Owners

What’s better than saving on taxes now? Building wealth while doing it. Tomorrow, we’re diving into SEP IRAs, ROTH 401(k)s, Solo 401(k)s, Safe Harbor 401(k)s, and Defined Benefit Plans—and why most small business owners aren’t using them right.

Got questions on hiring family members? Drop a comment or send me a message!