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    Entity & Business Structure

    Family Employment & Income Shifting

    Shift Income to Lower Tax Bracket Family Members

    Employing family members in your business is a legitimate strategy to shift income from higher to lower tax brackets while providing real work experience and compensation. Children under 18 employed by a sole proprietorship or single-member LLC owned by a parent are exempt from FICA taxes. Properly structured family employment can fund education, retirement accounts, and teach financial responsibility while reducing overall family tax burden.

    See Your Potential Savings

    Based on a typical client profile for this strategy

    $7,373
    Annual Tax Savings
    $500
    Implementation Cost
    $6,873
    Net Year-1 Benefit
    $34,365
    5-Year Cash Benefit
    Schedule ConsultationGet Personalized Estimate

    Real Results: Client Success Story

    Tax Before
    $0
    Tax After
    -$7,373
    Total Savings
    $7,373
    Infinity% Reduction

    "A sole proprietor in the 35% bracket employs their 16-year-old child for legitimate office work at $14,600/year (2024 standard deduction). Child pays zero federal income tax. Business saves FICA since child is under 18. Parent shifts income to 0% bracket."

    *Illustrative scenario for educational purposes. Tax savings depend on individual circumstances, income level, entity structure, and proper implementation. Consult with a tax professional to determine eligibility.

    Do You Qualify? Quick Self-Assessment

    This strategy may be right for you if:

    Must perform actual, legitimate work for the business
    Reasonable pay for work performed (document market rates)
    Proper payroll records and W-2 issuance
    Age-appropriate duties and hours
    Treat as regular employee with documentation
    Comply with state child labor laws

    Check 3 or more? You may be a good candidate for this strategy. Schedule a free consultation to calculate your potential savings.

    Investment Levels

    Strategy Session
    $450-$750
    per session (1-1.5 hrs)
    • Current situation analysis
    • Tax reduction opportunities
    • Action item roadmap
    • Follow-up summary
    Get Started
    Most Popular
    Comprehensive Plan
    $2,500-$6,000
    per plan
    • Full financial analysis
    • Multi-year projections
    • Entity optimization
    • Implementation support
    Get Started
    Ongoing Advisory
    $600-$1,500
    per month
    • Quarterly planning calls
    • Transaction review
    • Legislative updates
    • Priority access
    Get Started
    Implementation
    $1,500-$5,000
    per project
    • Structure analysis
    • Document preparation
    • IRS filings
    • Transition planning
    Get Started

    Related Strategies

    S-Corp Election
    Reasonable Compensation
    Retirement Plan Optimization
    Solo 401(k)
    Deep Dive

    Explore the Details

    For those who want to understand the full picture

    Real-World Example: Before & After

    Business owner with children or spouse
    Sole Prop or Partnership (best for FICA savings)

    A sole proprietor in the 35% bracket employs their 16-year-old child for legitimate office work at $14,600/year (2024 standard deduction). Child pays zero federal income tax. Business saves FICA since child is under 18. Parent shifts income to 0% bracket.

    BEFORE Strategy

    Taxable Income:$200,000
    Tax Liability:$0

    AFTER Strategy

    Taxable Income:$200,000
    Tax Liability:-$7,373

    Shifting $14,600 saves 35% income tax ($5,110) plus 15.3% SE tax ($2,234) on parent, while child pays $0. Total annual savings: $7,373. Must pay reasonable rate for actual work performed.

    IRS Authority & Professional References

    IRC § 3121(b)(3)(A)
    FICA Exemption for Child Employees
    Exemption from Social Security/Medicare for children under 18 employed by parent's sole proprietorship
    IRC § 3306(c)(5)
    FUTA Exemption
    Exemption from federal unemployment tax for child employees
    IRC § 73
    Services of Child
    Compensation paid to child included in child's gross income
    Treas. Reg. § 31.3121(b)(3)-1
    Family Employment Rules
    Detailed rules for family member employment exemptions
    IRC § 162
    Reasonable Compensation
    Deductible if reasonable for services actually rendered
    Eller v. Commissioner
    Tax Court (1977)
    Established legitimacy of employing children in family business

    Key Benefits

    • Shift income from high to 0% or 10% tax bracket
    • Children under 18 exempt from FICA (sole prop/partnership)
    • Funds child's Roth IRA contributions with earned income
    • Teaches work ethic and financial responsibility
    • Business gets legitimate deduction for wages paid
    • Child can earn up to standard deduction tax-free

    Requirements & Risks

    Requirements:

    • •Must perform actual, legitimate work for the business
    • •Reasonable pay for work performed (document market rates)
    • •Proper payroll records and W-2 issuance
    • •Age-appropriate duties and hours
    • •Treat as regular employee with documentation
    • •Comply with state child labor laws

    Risks to Consider:

    • !IRS scrutinizes family employment arrangements closely
    • !Unreasonable pay will be recharacterized
    • !S-Corp or C-Corp employees don't get FICA exemption
    • !Must comply with child labor regulations
    • !Fictitious employment arrangements are fraud

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    Last updated: September 12, 2026