When it comes to running your own business, you may be faced with the opportunity to hire your family members. This can be advantageous and disadvantageous for several reasons. If you do choose to hire family members, it is important to note that you must treat your family employees the same as any of your other employees.
But, when it comes to taxes, the rules and regulations for family members are slightly different than other employees. The taxes you withhold and report from family members depend on the role they hold in the company and the employer’s relationship with them.
The following information may assist you with understanding tax requirements for family employees:
Requirements for All Family Employees
Complete a W-4 Form
Once your family member is hired they must complete a Form W-4, Employee’s Withholding Certificate. The W-4 helps keep track of your employees’ allowances and dependents and will ensure you are withholding the correct federal income tax from their pay.
For employees, accurately completing your W-4 can help you prevent having a big balance due at tax time. It can also help you avoid overpaying on your taxes so you can put more money in your pocket during the year.
Withhold FICA Taxes
FICA, Federal Insurance Contributions Act, is a US federal payroll tax. FICA taxes include Social Security and Medicare taxes which must be withheld from an employee’s pay and matched by the employer. Employers must withhold FICA taxes from family members they employ and include family member pay when determining FICA taxes their business owes.
Federal Unemployment taxes (FUTA) are taxes that must be paid by the employer based on employee pay. While employers do not need to withhold FUTA taxes from family member pay, they must include family members’ pay in calculations for unemployment taxes and worker compensation.
If a family member you hired qualifies for benefits such as your company health plan, you must provide that family member with all of applicable company benefits. You must also provide family members with the same paid time off, sick leave, holiday leave, and overtime pay as other employees.
No – but must pay FUTA when a child is over 21 and works for a corporation, partnership, or an estate.
Here is a breakdown of each category listed in the above chart:
Child Employed By Parents
It is important to note that before your child (or any child) begins working for your business, you should become acquainted with all of the Federal and State child labor laws. There are several important regulations to protect children in the workplace that you don’t want your business violating. For example, children under 14 are not allowed to work in any type of business.
The IRS states, “Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child.” Payments for the services of a child under age 21 who works for his or her parent in a trade or business are not subject to Federal Unemployment Tax Act (FUTA) tax. However, payment for the services of a child are subject to income tax withholding, regardless of age. Although you must withhold income taxes from the child’s pay, they may get it back if their total income is not large.
Payments for the services of a child are subject to income tax withholding as well as Social Security, Medicare, and FUTA taxes if they work for:
A corporation, even if it’s controlled by the child’s parent, or
A partnership, even if the child’s parent is a partner. unless each partner is a parent of the child, or
An estate, even if it is the estate of a deceased parent
Parent Employed By Child
The wages for the services of a parent employed by his or her child in a trade or business are subject to income tax withholding and social security and Medicare taxes. Wages paid to a parent employed by his or her child are not subject to FUTA tax, regardless of the type of services provided.
One Spouse Employed By Another
The IRS states, “A spouse is considered an employee if there is an employer/employee type of relationship, i.e., the first spouse substantially controls the business in terms of management decisions and the second spouse is under the direction and control of the first spouse.”
The wages for the services of an individual who works for his or her spouse in a trade or business are subject to income tax withholding and Social Security and Medicare taxes, but not to FUTA tax. However, if your business is a corporation or a partnership, you must include that spouses’ pay in unemployment tax calculations.
PayWow is a payroll software that specializes in providing industry-specific solutions. If you are planning on hiring your family members or any new employees/contractors, PayWow is here to help you onboard them and handle their new hire reporting. PayWow will ensure all your employees are paid on time, accurately, and receive professional pay stubs. You can also meet your quarterly and annual Federal and State filing requirements (Forms 941, 904, W-2, and 1099s) with PayWow. Handling payroll and staying IRS-compliant is simple with PayWow!