Paying a family member for work done in your business is one of the most effective tax-saving strategies available to business owners. Most people are familiar with putting younger children on payroll, and that’s a solid move. But there’s a lesser-known approach that can work just as well for older children and other relatives, and in the right circumstances, it can eliminate payroll taxes while shifting income to a lower tax bracket.

Here’s how it works and what you need to get it right.

The standard approach: hiring your child

If you run a sole proprietorship and hire your child under age 18, federal tax law generally exempts both of you from Social Security and Medicare taxes. Wages paid to a child under 21 are also exempt from federal unemployment tax. That’s a meaningful tax saving benefit for sole proprietors with younger children.

But if your business is structured as a corporation or your child is 18 or older, those wages are typically subject to payroll taxes. That’s where a different strategy can help.

What’s possible with a one-time project

Rather than hiring a family member as an employee, you can pay them to complete a single, defined project. When structured correctly, this arrangement allows you to unlock real tax saving benefits:

• Deduct the payment at your higher tax rate
• Have your family member report that income at a significantly lower rate
• Avoid payroll taxes for both parties

2026 example

That $7,880 is the minimum benefit. If your state has an income tax, the tax savings grow even further. If you’re self-employed, it increases further because you also reduce your self-employment taxes.

Why one-time projects avoid self-employment tax

The tax code defines “net earnings from self-employment” as income from a trade or business carried on by the individual. The Supreme Court has clarified that a trade or business requires both continuity and regularity, meaning a sporadic or one-time activity generally doesn’t qualify.

This distinction matters. When a family member completes a true one-time project, that income is not subject to self-employment tax. The Tax Court confirmed this in Batok, ruling that a one-time window installation job was not continuous or regular, and therefore did not rise to the level of a trade or business.

IRS rulings reinforce the line between occasional and ongoing activity. An individual who accepts a single paid speaking engagement is not in a trade or business. But a member of Congress who gave ten paid speeches in a single year was ruled to be engaged in a separate trade or business, and that income was subject to self-employment taxes.

What qualifies as a one-time project

Good examples of qualifying projects include:

• Building a website
• Creating videos or marketing materials
• Painting an office
• Installing fixtures or equipment

The key is that the work is defined, finite, and not part of a regular ongoing arrangement. Students heading into summer break who might need $20,000 or so for the coming school year are a natural fit for this kind of tax saving oppurtunity.

Worker classification still matters

A one-time project does not automatically make your family member an independent contractor. The IRS still evaluates behavioral control, financial control, and the overall relationship between the parties. Even a short-term worker can be classified as an employee.

Because you want your family member to avoid both employee and independent contractor status, how you structure the arrangement makes a real difference. In most cases, the cleanest approach is to have the business purchase materials directly and pay the family member a fixed price for the completed project. This keeps things simple and avoids the complications that come with the family member tracking and reporting their own expenses.

Documentation: what works and what doesn’t

What doesn’t work

• Omitting a written description of the project
• Using vague language like “help around the office.”
• Having the worker buy materials or track expenses
• Using time sheets or paying hourly
• Failing to document that the project was completed
• Paying below market value

What works

• A clear written description with scope and one-time nature noted
• Business purchases all materials
• Single lump-sum payment upon completion
• Before-and-after photos or basic proof of work
• Payment at a reasonable market rate

Key takeaways

A properly structured one-time project avoids putting your family member on payroll, allows them to avoid self-employment taxes, and shifts income from your higher tax bracket into theirs, making it one of the most overlooked tax saving moves for business owners.

This strategy is highly dependent on facts and proper execution. Pay close attention to worker classification rules, whether the activity rises to the level of a trade or business, and thorough documentation of the project and payment.

Tax Planning, Bookkeeping, and Advisory Experts

Redbud Tax & Advisors Tip: This tax-saving strategy can be powerful, but only when it’s structured correctly. If you’re thinking about paying a family member for project-based work and want to make sure it holds up to IRS scrutiny, professional guidance can make all the difference. Redbud Tax & Advisors helps business owners implement tax-saving strategies, stay compliant, and avoid costly mistakes.

Visit redbudllc.com/contact-us to schedule a consultation and receive expert guidance tailored to your financial situation.