Hiring Family Members

Tax Strategies for Hiring Family Members

A History

Hiring family members is nothing new. For generations, small businesses have been passed down through the family line. Family farms, for example, might move from one generation to the next, with the new generation starting to work on that farm before they even turn 16.

It’s not just farming, either; many small businesses are really “family” businesses. Each member of the family participates in helping to make the business a success. For many families, this will not only help to grow the business, but may have a number of tax advantages, as well. Given the current tax code, there are some real advantages to hiring family members.

All of that said, there are specific rules you need to follow when hiring family members to work or working for your family. From the tax perspective, here are some of the key rules the IRS expects you to follow:

•Social Security and Medicare taxes. If you’re paying your child to work for you and that child is under the age of 18, she may not be subject to social security or Medicare taxes. This only applies if the business is a sole proprietorship, or if it is a partnership where each of the parents are the only partners. This is a significant tax savings for both you as the employer hiring family members, and for your child as the employee.

•Unemployment taxes. If your child is under the age of 21 and they work for you, they aren’t subject to the FUTA (Federal Unemployment Tax Act). Here again, you’re looking at a significant tax savings by hiring family members when compared with hiring someone that doesn’t work for you.

•Withholding of income tax. If you hire a child to work for you, you still have to withhold their income tax payments, no matter their age.

Hiring Family Members Not Always Tax Beneficial

•When children aren’t exempt. These rules are in place to help a business that’s strictly a family business. Accordingly, there are some scenarios in which the above rules don’t apply to your children. For example, if you control a corporation and that corporation employs your child, they still have to pay social security, Medicare, and FUTA taxes. The same goes if you’re a partner in a business, but there are partners in the business that are not a parent of your child. In these cases hiring family members does not offer the same tax benefit.

•Spousal employees. The rules are a little bit different for a spouse than they are for a child. If you work for a spouse, your wages are subject to social security as well as Medicare taxes, but they are not subject to FUTA tax. However, income tax withholding is still required. The same rules apply as with a child; a corporation or partnership in which someone other than the spouse is a partner will nullify the exception.

•Being employed by your child. When you work for your child, your child has to withhold income taxes as well as social security and Medicare taxes. However, those wages are not subject to FUTA taxes.

•Family provided child care. Generally, if you pay wages to your parent for services outside of your business, you don’t have to withhold taxes and social security and Medicare taxes don’t apply. The exception is if you perform domestic services for your child, and your parent cares for your child for you. There are certain parameters when this applies, however, so check with your tax professional to see whether or not you’ll need to pay those taxes.

•The work that your family provides. One of the key concerns about hiring family members and the tax implications of such has to do with how the IRS will see the situation. If you hire your 15 year-old to work for your business, for example, you need to make sure that she’s truly working for your business. The work she’s doing needs to be real and she needs to be paid a fair market value for the work. You can’t simply pay her $10,000 a year to lick stamps twice a day and think that the IRS isn’t going to worry about those wages.

Hiring family members can be a tremendous benefit to you and to your business. Make sure you understand and follow all of the applicable rules. If you’re not sure, talk to your tax expert today and see what you might need to do in order to get things configured correctly.

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