Employing Family Members in Your Business

Employing Family Member IRS Video

Are you a business owner?  If so, you maybe like many others in your situation, who are employing family members and are confused about the IRS requirements for tax withholding, etc.  In this short video Jean Wetzler is talking with Cheryl Sherwood of the IRS about employing family members.

There might be significant advantage to operating your own business is the ability to hire family members. The tax requirements for family employees may differ from other employees.

The rules vary, depending on the family relationship – a child working for a parent; spouse for spouse; parent for child. The business entity type – sole proprietorship, partnership, etc. – also has an effect.

If you employ a child, the payments for the his or her services are subject to income tax withholding, regardless of age.

If the child is under 18, and working for a parent in a trade or business, payments are not subject to Social Security and Medicare taxes. That’s if the business is a sole proprietorship, or a partnership in which each partner is the child’s parent.

If the child is under 21, payments for services are not subject to FUTA – that’s federal unemployment – tax.

However, if your business is one of three types, you must withhold income tax, Social Security, Medicare and FUTA taxes from your child’s wages.  This applies to: A corporation, even if it’s controlled by the child’s parent, An estate, even if it’s the estate of a deceased parent, or A partnership, if one of the parents is a partner. You’ll recall that I mentioned earlier that this doesn’t apply if both parents are partners.

I know it maybe confusing, but if you see it all laid out it may be less complicated.  Here is a good resource:

Go to www.IRS.gov and  search for “Employing Family,” or “Business with Employees.”