Hiring Family for Your Business
The IRS updated its guidance last month on hiring family for your business. Having a family business provides many advantages; one of course is the ability to hire family members. Keep in mind that employment tax requirements for family employees may vary from those that apply to other employees. The following information from the IRS provides an overview of differences in employment tax law when hiring family for your business:
Children employed by their parents
If the business is a parent’s sole proprietorship or a partnership in which each partner is a parent of the child:
- Payments for the services of a child are subject to income tax withholding regardless of age.
- Payments for the services of a child under age 18 are not subject to social security and Medicare taxes. If the child is 18 years or older, then payments for the services of a child are subject to social security and Medicare taxes.
- Payments for the services of a child under age 21 are not subject to Federal Unemployment Act (FUTA) tax. If the child is 21 years or older, then payments for the services of a child are subject to FUTA taxes.
If the business is a corporation, a partnership (unless each partner is a parent of the child), or an estate (even if it is the estate of the deceased parent of the child):
- Payments for services of a child are subject to income tax withholding, social security taxes, Medicare taxes and FUTA taxes regardless of age.
Parents employed by their child
If the business is a child’s sole proprietorship:
- Payments for services of a parent are subject to income tax withholding, social security taxes and Medicare taxes.
- Payments for services of a parent are not subject to FUTA tax regardless of the type of services provided.
If the business is a corporation (even if controlled by the child), a partnership (even if the child is a partner), or an estate:
- The payments for the services of a parent are subject to income tax withholding, social security taxes, Medicare taxes and FUTA taxes.
If the parent is performing services for the child, but not for the child’s trade or business:
Payments for services of a parent are not subject to social security and Medicare taxes, unless the services are for domestic services and each of the following apply:
- You employ your parent,
- You have a child or stepchild living in the home,
- You are a widow or widower, divorced, or living with a spouse, who because of a mental or physical condition, can’t care for the child or stepchild for at least 4 continuous weeks in a calendar quarter and
- The child or stepchild is either under age 18 or requires the personal care of an adult for at least 4 continuous weeks in a calendar quarter due to a mental or physical condition.
Payments for services of a parent are not subject to FUTA tax regardless of the type of services provided.
Questions?
As always, should you have questions on this or other matters affecting you or your business, please call or email us to speak with a CPA today.
DISCLAIMER: The WM Update, WM Wednesday Wisdom, WM Daily Update, and other related communications are intended to provide general information, as of the date of this communication, and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.
