Hiring family members
One of the advantages of someone running their own business is hiring family members, which can provide a deduction for compensation paid. When including family members in business operations, certain tax treatment and employment tax rules apply.
Both spouses carrying on a trade or business.
If spouses carry on a business together and share in the profits and losses, they may be partners whether or not they have a formal partnership agreement. There are different filing requirements for a sole proprietor vs. a partnership.
The wages for the services of an individual who works for their spouse, or parent employed by a child, are subject to income tax withholding and Social Security and Medicare taxes, but not the Federal Unemployment Tax Act (FUTA).
Additionally, there are special rules for children employed by parents. Children under the age of 18 are not subject to Social Security and Medicare taxes on their wages if the business is a sole proprietorship or a partnership in which each partner(s) is a parent of the child. Additionally, the payments for wages to a child under age 21 are not subject to FUTA.
Please contact one of offices if you would like additional guidance on the tax impact of hiring family members on your business.