Employing Family Member

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.

The wages for the services of a child or 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 child's parent or the individual's spouse;

• A partnership, even if the child's parent is a partner, unless each partner is a parent of the child;

• A partnership, even if the individual's spouse is a partner; or

• An estate, even if it is the estate of a deceased parent.

In these situations, the child or spouse is considered to work for the corporation, partnership, or estate, not you.

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.

One spouse employed by another. 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. 

However, the payments for services of one spouse employed by another in other than a trade or business, such as domestic service in a private home, aren't subject to social security, Medicare, and FUTA taxes.

Please see Publication 15, Circular E, Employer´s Tax Guide, for more comprehensive information.

Source: irs.gov