But watch out for the pitfalls. The tax benefits you receive can depend on a number of factors.
"Hiring family members offers a good opportunity to reduce the business owner's income tax," says Joseph Saloom, tax partner at Crowe Chizek's Columbus office.
Children under 14 who earn income from an outside job or investments are taxed at the adult rate. But when you hire and pay your child out of your business, that income is subject to a lower children's rate.
Saloom says hiring children under 18 also provides the opportunity to reduce payroll and self-employment taxes.
"Children under 18 are not considered self-employed if paid by the parents," Saloom says.
The child does not have to pay the 15.3 percent Social Security tax, and neither does the parent. But these benefits only apply when the company is solely owned by one or both parents; any type of corporation must pay Social Security taxes.
Paying a spouse out of your business can help him or her plan for retirement.
"The spouse can take those earnings and put them in an IRA," Saloom says.
But if the spouse is considered a highly compensated employee, there are limits on how much of that income can be put toward retirement, says Tracy Kaufman, client service representative with Rea & Associates Inc. Employees are considered highly compensated if they paid $80,000 a year or more, or own 5 percent or more of the company.
If you hire your spouse and he or she has family health insurance coverage, the entire premium is tax deductible, say Saloom and Kaufman. Other items, including travel expenses incurred by the spouse, are also tax deductible.
Again, however, there are exceptions. The spouse of someone who owns more than 2 percent of S Corporation stock is also treated as someone who owns more than 2 percent, and is therefore unable to take the benefit deductions.
Even aunts, uncles and other family members outside the nuclear family can get into the act, says Saloom.
"It's very popular right now to offer directorships of corporations to aunts, uncles and cousins," he says. "They then have the opportunity to receive income to fund a retirement vehicle, typically a Keogh plan, which is a retirement fund for self-employment income." How to reach: Crowe Chizek, (614) 469-0001; Rea & Associates, (614) 889-8725