Hiring Family Members Tax Deduction: How to Pay Your Kids and Spouse the Right Way

By Brian Giesecke, CPA/EA | Giesecke Advisory

What if the next person you hired for your practice was already sitting at your dinner table?

It sounds a little too convenient. But hiring family members is one of the most effective — and most misunderstood — tax strategies available to practice owners.

Done right, it shifts income from your tax bracket to a lower one. Done wrong, it creates problems you didn't have before.

Let's walk through how it works, who qualifies, and what the IRS actually cares about.

Why Hiring Family Members Is a Tax Strategy

It comes down to one thing: tax bracket arbitrage.

Let's say you're in the 32% federal tax bracket. If you earn an extra $14,600 in your practice... you keep about $9,900 after federal taxes.

But what if you pay that $14,600 to your child for real work they do in the practice?

Your child's standard deduction for 2024 is $14,600. That means they pay zero federal income tax on that amount. You get a business deduction. And depending on your entity structure, you might avoid payroll taxes on those wages too.

The money stays in the family. You reduce your taxable income. Your child starts building work history and earned income that can fund a Roth IRA.

Everyone wins... if you do it correctly.

The IRS Rules for Employing Your Children

Here's where most people get into trouble. The IRS has specific rules, and they're not optional.

The work must be real. You can't pay your kid $10,000 to "help out" if they're not actually doing anything. They have to perform legitimate tasks — things you'd otherwise pay someone else to do.

What kind of work qualifies? Filing. Cleaning. Data entry. Social media management. Inventory. Shredding documents. Assisting with marketing materials. Restocking supplies. These are real tasks that exist in every medical practice.

The pay must be reasonable. You can't pay your teenager $50/hour to stuff envelopes. Pay them what you'd pay any other employee for the same work. Depending on the task and your location, $12-$20/hour is usually defensible.

Keep records. Timesheets. Job descriptions. Pay stubs. W-4s. Treat it like you would any other employee. If the IRS audits, you want documentation showing this was real employment — not a workaround.

Age matters — a lot. Children under 18 who work for a parent's sole proprietorship or single-member LLC taxed as a sole proprietorship are exempt from Social Security and Medicare taxes (FICA). That's an extra 15.3% in savings on top of the income tax benefit.

But here's the nuance that trips people up: this FICA exemption only applies to sole proprietorships and certain spousal partnerships. If your practice is structured as an S-corp or C-corp, the exemption doesn't apply. Your child's wages would be subject to normal payroll taxes, just like any other employee.

The Math: What This Actually Looks Like

Let's put real numbers on it.

Say you're a practice owner in the 32% federal bracket. You pay your 16-year-old $14,600 for legitimate part-time work over the year — roughly 15 hours per week at $18/hour during the summer and school breaks.

Here's what happens:

Your side: You deduct $14,600 from your business income. At a 32% marginal rate, that saves you about $4,672 in federal income tax. If you're a sole proprietor, you also avoid the 15.3% self-employment tax on that amount — another $2,234.

Your child's side: $14,600 falls entirely within their standard deduction. Federal income tax owed: $0.

Total family tax savings: roughly $6,900.

And your child now has earned income, which means they can contribute to a Roth IRA — up to $7,000 per year. Tax-free growth starting at age 16. That's a powerful head start.

Hiring Your Spouse: Different Benefits

What about paying your spouse to work in the practice?

This can also work, but the tax benefits are different than with children.

If you file jointly — which most married couples do — paying your spouse a salary doesn't shift income between tax brackets. You're taxed as a unit. So the bracket arbitrage that makes hiring kids so powerful doesn't apply the same way.

Where employing your spouse DOES help:

Retirement plan access. If your spouse isn't otherwise employed, paying them a salary creates earned income. That means they can contribute to a retirement plan — a 401(k), an IRA, potentially even a defined benefit plan. That's a significant tax shelter that wouldn't exist otherwise.

Health insurance benefits. If your practice is an S-corp, you may be able to provide health insurance and other fringe benefits through your spouse's employment. The rules here are specific, so work with your accountant on the details.

Legitimate business deduction. If your spouse genuinely handles admin, bookkeeping, HR, scheduling, or office management... that's real work. Paying them a reasonable salary for it is a valid business expense.

The key difference: hiring your spouse is less about tax bracket arbitrage and more about unlocking benefits and retirement plan contributions that wouldn't be available otherwise.

Common Mistakes That Get Practice Owners in Trouble

I see these regularly. Every single one is avoidable.

No documentation. This is the most common problem by far. No timesheets, no job description, no evidence the work actually happened. If the IRS asks — and they can — you need proof. A family relationship makes them look more closely, not less.

Inflated pay. Paying a 14-year-old $30,000 for part-time filing is a red flag. The IRS compares what you're paying to what you'd pay a non-family member for the same work. Be honest about what the work is worth.

No actual work performed. Paying a family member for work they didn't do isn't aggressive tax planning. It's fraud. The IRS draws a very clear line here.

Wrong entity structure. Remember — the FICA exemption for children under 18 only applies to sole proprietorships and certain partnerships. If you're operating as an S-corp or C-corp, your child's wages are subject to full payroll taxes. This doesn't mean you shouldn't hire them. It just means the savings are different, and you need to plan accordingly.

Ignoring state labor laws. Some states have restrictions on employing minors — hours, types of work, permits required. Know your state's rules before you start.

How to Set This Up the Right Way

If you're thinking about hiring a family member, here's a simple framework:

Start with real work. Look at your practice operations. What tasks exist that a family member could genuinely perform? Be honest. If the work isn't real, the strategy doesn't work.

Set a reasonable rate. Research what similar positions pay in your area. Document your reasoning. $15/hour for a teenager doing office filing is defensible. $45/hour is not.

Create proper documentation. Written job description. Signed offer letter. W-4 on file. Regular timesheets. Pay stubs or direct deposit records. Treat it exactly like hiring any other employee.

Talk to your accountant about entity structure. If you're a sole proprietor with kids under 18, you're in the best position for maximum savings. If you're an S-corp, the strategy still works — but the math is different. Your accountant can run the numbers for your specific situation.

Pay through a real payroll system. Don't just hand your kid cash. Run it through payroll. Issue a W-2 at year-end. This creates the paper trail that makes the whole thing defensible.

Is Anyone in Your Family Already Helping?

Here's a question worth sitting with...

Is someone in your family already doing work for the practice? Even informally?

Maybe your spouse handles scheduling or answers patient calls. Maybe your teenager helps with filing during the summer. Maybe your college student manages the practice's social media.

If real work is already happening, there might be a way to formalize it, pay them appropriately, and get a tax benefit you're currently missing.

The key is always the same: real work, reasonable pay, proper documentation.

Your Next Step

Pick one thing from this post that applies to your situation.

If you have kids who could do legitimate work in your practice... run the numbers. Even a few thousand dollars in wages can create meaningful tax savings when you're in a higher bracket.

If you're not sure how your entity structure affects the strategy... ask your accountant. The sole proprietorship vs. S-corp distinction matters more than most people realize.

And if you'd like a broader view of tax strategies worth reviewing this year, download the [Tax Planning Checklist for Medical Practices](#) — it covers this and a dozen other opportunities in one place.