Has your son or daughter gotten their diploma but not a job? Has your spouse recently lost their position due to a merger and offered to work in the family business? Has a parent recently retired and expressed an interest in part-time employment? One of the advantages of operating your own business is hiring family members as legitimate employees. There may be tax advantages as well!
Employment tax requirements for family employees may vary from those that apply to other employees. Here’s a summary:
Child Employed By Parents
Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child. Payments for the services of a child under age 21 who works for his or her parent in a trade or business are not subject to Federal Unemployment Tax Act (FUTA) tax. Payment for the services of a child are subject to income tax withholding, regardless of age. Thanks to the Tax Cuts and Jobs Act, your employee-child can use his or her standard deduction to shelter up to $12,200 of 2019 wages paid by your business from the federal income tax. The tax advantages for you is a business tax deduction for employee wage expense for money you might have shelled out as allowance anyway! The deduction reduces your federal income tax bill, and if applicable your self-employment tax bill and your state income tax bill.
Covered Services Of A Child
The wages for the services of a child are subject to income tax withholding as well as social security, Medicare, and FUTA taxes if he or she works for:
- A corporation, even if it is controlled by the child’s parent,
- A partnership, even if the parent is a partner, unless each partner is a parent of the child, or
- An estate, even if it is the estate of a deceased parent.
The wages for the services of an individual who works for his or her spouse in a trade or business are subject to income tax withholding and social security and Medicare taxes, but not to FUTA tax.
Covered Services Of A Spouse
The wages for the services of a spouse are subject to income tax withholding as well as social security, Medicare, and FUTA taxes if he or she works for:
- A corporation, even if it is controlled by the individual’s spouse, or
- A partnership, even if the individual’s spouse is a partner.
- You employ your parent;
- You have a child or stepchild living in the home;
- You are a widow or widower, divorced, or living with a spouse, who because of a mental or physical condition, can’t care for the child or stepchild for at least 4 continuous weeks in a calendar quarter; and
- The child or stepchild is either under age 18 or requires the personal care of an adult for at least 4 continuous weeks in a calendar quarter due to a mental or physical condition.
