Posted on: 30 September 2018Share
Hiring family members to help with your small business can be a way to draw everyone together with a common goal or get your kids a more solid start in their working life. But it may also be fraught with challenge when it comes to following the legal and tax requirements.
To help you find your way through this special employee process, here are the basic tax consequences of hiring your child, your parent, and your spouse.
Hiring Your Child
If your child is a minor and you operate a sole proprietorship or partnership of spouses, hiring them may be a great financial move. The minor child is generally not subject to Social Security, federal unemployment, or Medicare taxes. Your company saves money on its half of the taxes, and the child saves money on their half. If you combine this tax savings with the ability to contribute to an IRA with any earned income, your child could conceivably earn up to $5,500 annually with no taxes at all and get a jump start on things like college expenses.
Hiring Your Spouse
Spouses working for your sole proprietorship will have to pay Social Security and Medicare taxes, but they may be exempt from FUTA (Federal Unemployment Tax Act). This tax is up to 6% of the first $7,000 earned, so it's most valuable if you only need occasional work performed. You could also pay them to care for non-business tasks and avoid payroll taxes entirely.
Hiring Your Parent
As with hiring a spouse, parents who are employees are generally not exempt from payroll taxes but may be exempt from the FUTA tax requirement. However, if you hire your parent to do work outside your trade or business, you may be able to skip paying Social Security and Medicare taxes. This exemption does not apply to work done caring for your child, but it could apply to a parent doing other household chores or helping out with household business while you run your company.
What You Should Know
Generally, to make use of these allowances, you have to treat the family member as a regular employee — with appropriate pay for appropriate work, for instance. There may also be additional concerns regarding working together and mixing family relationships with business relationships. So, if you're thinking about hiring a family member within these limitations and tax rules, consult your local accounting services before deciding.