Do you need help in your business but aren't sure that you want to hire a permanent employee just yet? Hiring a member of your family — such as your spouse, parents or children — could give you tax savings, in addition to a helping hand with the business. That's because the IRS has different rules for employment taxes affecting family and non-family employees of a business.
How can you decide if hiring a family member is right for your business? Here's what you need to know.
Hiring a child
Depending on the type of business you own, you might be able to hire minor children (under age 18). Effectively, this is a way to transfer money from your own tax bracket to your child's lower tax bracket.
If your business is a sole proprietorship, or a partnership where both partners are parents of the child in question, wages paid to minor children aren't subject to Social Security or Medicare tax withholding and wages paid to children under 21 are not subject to Federal Unemployment Tax Act (FUTA) taxes. (You'll still need to withhold income tax from the child's paycheck, however.)
Your child's wages are subject to Social Security, Medicare and FUTA taxes if you own a corporation or a partnership that doesn't include both of the child's parents.
Hiring a parent
Considering hiring your mom or dad to work for your business? Their wages will be subject to Social Security, Medicare and income tax withholding. However, they aren't subject to FUTA tax withholding.
Hiring a spouse
The IRS considers your spouse an employee as long as there is a true employer/employee type of relationship. In other words, you must be in charge of the business and direct and control the work of your spouse. If you both have management roles in the business — for example, if your spouse is a partner in the business — they cannot be considered an employee, and their wages are subject to Social Security, Medicare and FUTA taxes.
A spouse’s wages are also subject to Social Security, Medicare and FUTA taxes if your business is a corporation or if it's a partnership that your spouse is not a partner in. However, if you own a sole proprietorship, your spouse's wages are not subject to FUTA taxes.
Because hiring family members can be complex, and tax law can change, consult your accountant for advice and to see what type of tax savings you could actually enjoy. This will help you make sure that hiring a child, parent or spouse is the best financial decision for both your business and your family.
Get more details about hiring family members at the IRS website.