Can you hire your spouse or your children?

Yes to both, and one of them carries a genuine and unusually generous tax advantage — but only if the work is real and the structure is right.

Hiring your child: the rule worth knowing

If you operate as a sole proprietorship or a partnership owned solely by both parents, wages paid to your own child under 18 are exempt from Social Security and Medicare tax. Under 21, they are also exempt from federal unemployment tax.

That is unusual. Normally every dollar of wages carries roughly 15.3% in payroll tax between employer and employee. Here it carries none.

The effect stacks:

• The wages are a deductible business expense, reducing your profit and therefore your income tax and your self-employment tax
• The child receives them with no payroll tax
• The child’s own standard deduction ($16,100 in 2026) shelters that income from federal income tax entirely, up to that amount

So money moves from your higher marginal rate to their zero rate, and skips payroll tax on the way.

The condition that makes or breaks it

The work must be real, and the pay must be reasonable for it.

This is not a formality. The IRS has successfully challenged arrangements where children were nominally employed but the work was fictional or the pay wildly exceeded its value.

What that means in practice:

• Genuine tasks: filing, data entry, social media, packing orders, cleaning the workspace, modelling for product photos
• Age-appropriate. A seven-year-old shredding documents is plausible; a seven-year-old as your bookkeeper is not
• Paid at a market rate for that work — what you would pay a stranger
• Documented: a timesheet or task log, and actual payment
• Actually paid, into an account in the child’s name. Not “credited”. Not spent on their normal upkeep, which you are obliged to provide anyway

Treat it as you would any employee, because that is what it is.

Structure matters enormously

The payroll tax exemption applies only if the business is a sole proprietorship, or a partnership where both partners are the child’s parents.

If you have an S corporation or a C corporation, the exemption is lost. Wages to your child from a corporation carry full payroll tax like anyone else’s.

This is a real tension: an S-corp election saves self-employment tax, but forfeits the family-employment advantage. If you employ your children meaningfully, factor that into the S-corp decision — our S-corp calculator covers the main comparison, but it does not model this interaction.

Hiring your spouse

Different, and usually less advantageous.

A spouse employed in your business is an ordinary employee: their wages carry full payroll tax, both halves. You gain a deduction for the wages, but you pay 15.3% on them — roughly what you would have paid in self-employment tax anyway. The net saving is often close to zero.

Where it can genuinely help:

• Health insurance. In some structures, employing a spouse allows the business to provide family coverage as a deductible employee benefit. This is fact-specific and worth professional advice.
• Retirement contributions. An employed spouse can receive employer contributions to a plan, increasing total household tax-advantaged saving.
• Social Security credits, if they would otherwise have none.

A spouse who is a genuine co-owner rather than an employee is a different arrangement again, with partnership filing requirements.

What you have to actually do

Employing anyone, including family, brings real obligations:

• Get an EIN if you do not have one
• Have them complete Form W-4 and Form I-9
• Run actual payroll and issue a W-2 at year end
• File payroll returns even where the tax is zero — the exemption removes the tax, not the paperwork
• Comply with state rules, which may not mirror the federal exemption, and with child labour laws on hours and permitted work

A payroll service costs a few hundred dollars a year and is worth it, because doing this informally is exactly what makes an arrangement indefensible.

An honest assessment

For a sole proprietor with a teenager who can genuinely do useful work, this is one of the few real family tax advantages remaining, and it is worth using properly.

For a spouse, the benefit is usually modest and specific — it is about health insurance and retirement, not about the wages themselves.

For anyone tempted to invent the work: don’t. The arrangement only holds up if it would look ordinary to someone reading the timesheets, and reclassification reaches back across years.

The calculator below shows what your profit costs before any of this — which is the baseline any family employment strategy has to improve on.