Do business owners gain a tax advantage by hiring family members as employees? The answer to this is yes, but there are several factors to consider. Here, we look at those variations and how they could apply to you and your business.
Employing Your Child
You want to hire your child, who is under 18, as an employee. He or she will also be subject to Medicare or Social Security taxes. This applies if your business is either a partnership, with each partner being a parent, or a sole proprietorship.
When paying your child under 21 for your business’s services, no FUTA (Federal Unemployment Tax Act) tax is due. Payment for his or her services will also be subject to withholding income tax, whatever your child’s age.
Your child’s wages are subject to Medicare, FUTA taxes, income tax withholding, and Social Security if your business is:
- a corporation (this applies even if you control it);
- a partnership (unless both partners are the child’s parents); and
- an estate (this applies even if it is an estate of a deceased parent)
Hiring your minor child as an employee allows income to shift from your higher income tax rate to the child’s lower rate. State income taxes could be applicable, likely at a lower rate. This can equate to some significant tax savings, particularly if you are employing multiple children.
Employing Your Spouse
If you employ your spouse, the wages paid are subject to Medicare taxes, Social Security, and income tax withholding. However, they are not subject to FUTA tax.
FUTA tax will apply, however, if your business is a:
- partnership (this applies even if you are a partner); or
- corporation (this applies even if you control it)
Employing Your Parent
Wages for parents employed by their children are subject to Medicare taxes, Social Security, and income tax withholding. However, they are not subject to any FUTA tax, whatever kind of services the parent provides for the business.
Should you employ your parent, wages earned for services not performed for your business are not subject to Medicare taxes, Social Security, and income tax withholding. They do, however, apply for domestic services as long as the following are applicable:
- You are employing your parent
- A stepchild or child is living at home
- You are one of the following: Divorced, widowed, or living with your spouse who suffers from a physical or mental condition.
The mental condition must prevent your spouse from caring for the child for a minimum of four continuous weeks within one calendar quarter when the stepchild or child is under 18. If the child is over 18, the child must require adult personal care for a minimum of four continuous weeks within one calendar quarter. This must be because of a physical or mental health condition.
Justifying Your Tax Savings
While there are tax savings you can make from employing family members, there are several considerations to keep in mind. First, family members must receive fair pay for work they perform. This means tasks must suit the capabilities of each individual. Of course, you must keep proper records regarding payments to family members.
There are also considerations regarding child tax credit and dependency status and possible implications for Federal Student Aid. With this in mind, it is essential to seek professional accounting advice when hiring family members as employees.
For questions or more information about this article, please contact our tax professionals at email@example.com or toll free at 844.4WINDES (844.494.6337).