Hartford Business Journal

HARTFORDBUSINESS.COM | MARCH 9, 2026 21 FOCUS | FAMILY BUSINES S EXPERT'S CORNER Family business owners can hire their children — with tax risks in mind By Andrea Harrington B ringing your children or other family members into the family business can be a smart financial strategy. Besides tax advantages for the business owners, there are great benefits for the kids too. But it's important to follow certain best practices as Junior joins the payroll. There are clear IRS guide- lines about providing bona fide business services and appropriate compensation. The topic of adding kids to the payroll often comes up as clients' children age into workforce participation, usually when they're in high school or their early 20s. According to U.S. labor statistics, there are more than 5.6 million workers aged 16 to 19. When a business owner hires their child, it's not necessary that a business has or advertises a vacant position. You can create a new role, but it does need to serve a legitimate business service. You cannot pay them to sit in the office after school and do homework. In addition, the compensation needs to be reasonable for the service provided. Ask yourself what you would be paying for an outside hire to do the job, and be sure you can justify the wage under audit. The job can be part-time or full-time, although if you plan to offer the child access to a retirement plan, there are usually participation rules about the hours worked. Making it a win-win One reason parents may benefit from putting kids on the payroll is shifting the amount they're paid into a lower tax bracket. Many middle-market businesses are flow-through entities, so the business does not pay federal income tax. It is accounted for on the parents' personal income tax return. The wage is a busi- ness deduction, reducing the parent's income, which is typically taxed in a higher bracket. The child's wage is often taxed in a lower bracket. As kids start learning the family busi- ness and gaining real-world experience, there are financial benefits in addition to their actual wages. They start paying into Social Security and building a history with the Medicare system. If the child is full-time and the busi- ness offers a retirement program, they can start early and enjoy long benefits of compound interest. Learning about and starting retire- ment savings may be especially important if the parents' retirement is tied up in the family business. That child will need their own plan. Avoid common pitfalls It is illegal to just distribute money to the child and claim a business deduction. That's a gift. Remember, all expenses of the business need to have a valid business purpose. The IRS may scrutinize familial relationships more in an audit, so it's important to be able to fully justify their work and compensation. There's a double tax whammy if you run afoul and an audit deems the child's work is not an eligible business deduc- tion. The parents will have paid that money to the child who paid income taxes on it, but they lose the business deduction and must pay taxes, plus interest and penalties. The family is then paying income taxes twice. Plus, mistakes could trigger audits for other years. As entrepreneurs, parents running a family business may place a high value in instilling a sense of hard work in their children. There is also value in showing the kids how to avoid the pitfalls that can turn a well-intentioned hire into an audit risk. Putting kids on the payroll in a way that illustrates the difference between good habits and risky shortcuts sets everyone up for success. Andrea Harrington, CPA, is a partner at accounting and advisory firm Fiondella, Milone & LaSaracina LLP (FML CPAs). Andrea Harrington A SMALL BUSINESS GIVEAWAY 2026 One Connecticut small business will win a full page ad in the Small Business Issue of HBJ on May 4 and 12 months of free Cash Management Services from TSB. The winner will be notified around April 1st. PRESENTED BY SCAN HERE TO NOMINATE! NOMINATIONS OPEN | JANUARY 12 - MARCH 16

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