Can I put my spouse or children on payroll?

Family members can be paid, but only for real work at a reasonable wage, with the same records you would keep for any employee. Wages to your children can shift income to a lower bracket and, in a family business, may avoid certain payroll taxes. A spouse on payroll can open access to retirement contributions and a medical reimbursement arrangement. Documentation decides whether it holds.

Key points

A spouse or child can be placed on payroll only for genuine work at a wage an unrelated worker would earn for the same job.
Wages paid to a child are deductible to the business and taxed to the child, who usually has little other income and a lower bracket.
In a business owned entirely by the parents, wages paid to a child under the applicable age can be exempt from certain payroll taxes.
A spouse who is a bona fide employee can join the company retirement plan and, in some entity structures, a written medical reimbursement arrangement.
Each family employee needs a job description, time records, payroll tax filings, and payment into the person's own account to hold the deduction.

What must be true before a family member can be paid?

Paying family members is legitimate and common, but examiners look at it closely because the arrangement only works when it reflects real employment. The rule is simple: pay for actual work, at a wage a stranger would earn for the same job, and keep the same records you would keep for any other employee. The wage is deductible under the ordinary-and-necessary standard only to the extent it is reasonable for the services performed.

That means a job description, a rate set against what an unrelated worker would be paid, time or task records, and wages run through payroll with the normal withholding and filings.

How does hiring your children shift income?

Hiring your children moves income from your higher bracket to their lower one. When the work is genuine and the pay is reasonable for the tasks and the child's age, the wages are deductible to the business and taxed to the child, who often has little other income and may owe nothing after the standard deduction.

In a business owned entirely by the parents, such as a sole proprietorship or a partnership of the two parents, wages paid to a child under a certain age are also exempt from Social Security and Medicare taxes, and under a somewhat higher age from federal unemployment tax. The ages should be confirmed for the current year. The exemption does not apply when the employer is a corporation, which is one reason some owners route family wages through a separate family-owned management entity. The work has to be real: filing, cleaning, packaging, social media, data entry.

What does putting a spouse on payroll unlock?

A working spouse who earns wages can participate in the company retirement plan, which increases the household's tax-deferred savings. In some structures, a spouse who is a bona fide employee can also be covered by a medical reimbursement arrangement under a written plan, allowing the business to reimburse family medical costs as a deductible employee benefit rather than a personal expense.

These benefits depend on the entity type and on the spouse doing genuine work. A sole proprietor employing a spouse can generally offer the reimbursement plan; an S corporation owner's spouse is treated differently because of the ownership attribution rules. The design matters, and it should be set up with your CPA before the first paycheck.

When does paying family members not hold up?

A modest wage for real part-time help is easy to defend. A large salary to a young child for vague duties is not, and it invites exactly the scrutiny you want to avoid. Paying a child and then spending the money on ordinary parental obligations undercuts the position; the wages belong in the child's own account.

Coordinate the wage level with the rest of the plan. Wages affect the child's own filing requirement, the household's retirement contributions, and, for a spouse, eligibility for benefit plans. Run the numbers with your advisor before setting the pay so the arrangement helps the whole picture. The deduction is only as strong as the facts behind it.