So can you hire family? Absolutely.
In fact, hiring family members is pretty common amongst sole proprietors. Whether it causes strained relationships is entirely up to you, but here’s what you need to know in regards to taxes and paying family members. The Internal Revenue Services outlines the following regarding family help.
Employing Your Child
- Wages of a child are subject to income tax withholding, Social Security, Medicare, and Federal Unemployment Tax Act (FUTA) tax if he or she works for:
- A corporation, even if it is controlled by the child’s parent,
- A partnership, even if the child’s parent is a partner, unless each partner is a parent of said child, or
- An estate, even if it is the state of a deceased parent.
- Wages are subject to income tax withholding, regardless of age.
- Children under 18, 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.
- Children under 21, are not subject to FUTA tax.
Employing Your Spouse
- Wages 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.
- Payment to a spouse are subject to income tax withholding and Social Security and Medicare taxes, but NOT to FUTA tax.
Employing Your Parent
- Payment for services of a parent employed by their child in a trade or business are subject to income tax withholding, Social Security and Medicare taxes.
- Wages are not subject to FUTA tax, regardless of the type of services provided.
- If your parent works for you, the wages you pay to them are subject to income tax withholding, Social Security and Medicare taxes. Social Security and Medicare taxes do not apply to wages paid to your parent for services not performed in your business, but they do apply to domestic services if both the following conditions are met:
- Said parent cares for your child who lives with you and is under 18 or requires adult supervision for at least 4 continuous weeks in a calendar quarter due to a mental or physical condition.
- You are widowed, divorced, or married to a person who, because of a physical or mental condition, cannot care for your child during that period.
Employing Other Family Members
So you’re not hiring your child, spouse, or parent. Can you still hire other family members, like aunts, uncles, cousins, or nieces or nephews? Yep. But there aren’t any special rules provided by the IRS for those family members. Their wages should be treated like any other employee’s.
If you have additional questions regarding hiring family members, feel free to drop us a line. We’d love to hear from you.
Ben Sutton is the founder of Mazuma USA, an accounting firm providing tax, bookkeeping and payroll services to small businesses. Since founding Mazuma, Ben has established himself as an expert in the small business world. He’s still driven by that same desire to provide accounting help to all small businesses – from photographers, bloggers and creatives to lawyers, doctors, and dentists, everyone needs affordable accounting help. Ben is a Certified Public Accountant, and a member of the American Institute of Certified Public Accountants. But Ben considers his greatest achievement and credential to be his happy wife and four children.