Tax implications of employing family members at your small business

The tax rules for family employees may differ from other employees depending on the family relationship and the business entity type.

Let´s start with a child working for a parent.

Payments for the child´s services are subject to income tax withholding, regardless of age.

However, if the child is under 18 and working for a parent in a trade or business, payments are generally not subject to Social Security and Medicare taxes.

And if the child is under 21, those payments are not subject to FUTA.

That´s unemployment tax.

However, if the business is structured as a corporation, an estate, or a partnership where only one of the parents is a partner, then you must withhold all of these taxes from the child´s wages.

Now, what if a parent is working for their child?

If the child employees the parent in a trade or business, then the child withholds income tax, Social Security, and Medicare taxes.

Wages paid to the parent are not subject to FUTA tax, regardless of the type of services, but if your parent works for you in some other capacity not related to your business, Social Security and Medicare taxes do not apply to the wages paid to them.

But they do apply to some domestic services where certain conditions exist.

Our final situation would be a spouse employed by the other spouse in a trade or business.

These wages are subject to income tax withholding and Social Security and Medicare taxes but not FUTA tax.

There are exceptions.

If the spouse works for a corporation, even if it´s controlled by the individual´s spouse, or a partnership, even if the individual´s spouse is a partner, in those cases, FUTA tax would apply, too.

The IRS has many resources to help you understand all these nuances in the tax law when it comes to employing family members.

You can go to IRS.gov and enter "Employing Family" or "Business with Employees" in the search box.

And you can also download Publication 15, Circular E, Employer´s Tax Guide, for more comprehensive information.

Source: irs.gov