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As a business owner, you have probably either already hired family members or you’ve considered it. It can be a way of sharing your success with those closest to you or a way of keeping business in the family.
Hiring family has great tax benefits but it can have consequences if done incorrectly. The rules are rather complex, mostly depending on the relationship between boss and worker and the types of withholding taxes. Employers must withhold Federal income taxes, Medicare, Social Security (FICA) taxes, and FUTA unemployment taxes (in most cases).
Let’s break it down a bit…
Employing a Parent: Most people like to be as independent as possible for as long as possible. A part-time job working for a son or daughter is an excellent way for older people to remain at least semi-independent when they are unable or unwilling to work full time. In most of these situations, you must withhold income and FICA tax, but not FUTA tax. However, the FUTA exemption does not apply if the parent provides “domestic services” (like drivers, housekeepers, and babysitters) and:
- A minor dependent special needs child or stepchild lives with you, and
- You live alone or your spouse cannot care for a dependent for at least four consecutive weeks.
Employing a Child: Employing a child can result in significant tax savings, so the IRS keeps a close eye on it. These tax benefits are only available to sole proprietorships and spouse partnerships. Corporations, including LLCs, and non-spouse partnerships are ineligible. If you hire your child, they must do the same work as other similarly situated employees and receive no special treatment. However, you must note a couple things about salaries.
- If the child is under 21, their salary is normally a deductible business expense.
- If the child is between 18 and 21, you are exempt from FUTA withholding.
- If the child is under 18, you are exempt from both FUTA and FICA withholding. Child labor laws occasionally come into play here as well.
Spouse Partnerships: If you’re planning to partner with your spouse, the arrangement must be 50-50 partnerships. If one “partner” runs the show, at least in part, the relationship is employer and employee. The spousal partnership enterprise must file Form 1065.
The qualified joint venture (QVC) rule could apply in some cases. QVCs can be ideal for spouses who want to work together, but don’t want to deal with the partnership oversight and paperwork. According to the IRS, a qualified joint venture exists if:
- The only members are spouses who file a joint return,
- Both spouses materially participate in the business, and
- Each spouse waives a partnership.
Spouse Employees: Sole proprietors who hire their spouses must withhold everything except FUTA taxes. So, there is a minimal tax savings, at least in most cases. However, health insurance premium savings could apply. You may be able to deduct premium payments as fringe benefits
Hiring your family can save you a lot of money in taxes. This is just one of the strategies that we teach in our DeTax University program. Join today to learn other ways to save! When you combine our different strategies you are guaranteed to save over $10,000 a year on taxes.