As a boss, you may hire family members and pay reasonable salaries for the work they do in your business.
For example, you could hire your son or daughter to perform routine clerical or cleanup tasks. Your child’s salary would be a tax-deductible business expense, and your child’s income would be tax-free up to that year’s standard deduction amount for a single taxpayer ($5,950 for 2012). Wages in excess of that amount would be taxed at your child’s rates, which are probably lower than yours.
You can compound the benefits of this strategy by having your child contribute to an IRA, which is likely to enjoy many years of tax-deferred growth.
Wages paid to a spouse by a sole proprietor are subject to payroll taxes; those paid to your children who are under the age of 18 are not. Compensation paid has to be reasonable for the services performed.
