🧾 Workers’ Compensation When Hiring Your Kids (and Other Dependents)
When you hire your children or dependents in your family business, you’re taking advantage of one of the most powerful tax strategies available to small business owners. But along with the benefits come a few responsibilities — and one of the biggest questions is: do you need workers’ compensation insurance?
The General Rules
Workers’ compensation (WC) laws are state-based, and nearly every state requires coverage when you hire any employee, even if they’re a family member. WC protects both the worker and the business — it pays for medical care and lost wages if someone gets hurt on the job, and it limits your liability as an employer. This is an area that you don’t want to DIY or relay on AI to advise you.
When hiring your dependents:
- Minors count as employees. Most states treat your working child just like any other employee.
- Family members aren’t automatically exempt. Some states let you file a written waiver or exclusion for immediate family members in sole proprietorships or partnerships — but rarely for corporations or LLCs.
- Owners can often opt out. You may be able to exclude yourself or your spouse if you actively work in the business, but the kids usually must be covered.
Strict vs. Lenient States
Workers’ comp rules vary widely:
- Strict enforcement example: California.
California requires coverage for any employee — even one part-timer or a teenage child helping in the shop. There are virtually no family exemptions, and enforcement is tough; penalties for operating without WC can reach tens of thousands of dollars. - More lenient example: Texas.
Texas is the only state where most private employers are not required to carry workers’ compensation. Coverage is optional (“non-subscriber system”), but if you skip it, you assume full liability for workplace injuries — so it’s often still smart to carry a policy.
How PaprikaTax Can Help
If you’re unsure whether your family business needs workers’ compensation coverage, PaprikaTax can help you navigate it. When you submit your information through our app at app.paprikatax.com, there’s a question box at the bottom of the page — use it to ask us anything about workers’ comp or related employment rules like for example, can you circumvent the workers’ compensation insurance if your dependent is self employed?
We’ll address your questions when preparing your CPA-signed tax opinion, ensuring your setup is compliant and audit-ready.
Prefer to talk it through?
You can also book a live consultation at cal.com/paprikatax/30min to discuss your specific situation and get clarity on what’s required in your state.
– Written by David Nagy, CPA, PaprikaTax.com
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