Family Employees & Payroll Taxes

There are certainly a plethora of reasons to hire your child, spouse, or a parent. The tax advantages are undeniable but one must be very careful to ensure compliance with the various IRS regulatory complexities that pertain to these situations. Here I have laid out some of the things you need to be aware of with respect to hiring your family.

Child employed by his or her parents.

A child that is under age 18 who works for his or her parent in a trade or business isn't subject to social security and Medicare taxes provided the business is a sole proprietorship or a partnership in which each partner is a parent.  Furthermore, if the child performs domestic work in the parent's private home, payments made are not subject to social security and Medicare taxes until the child reaches age 21Payments for the services of a child under age 21 who works for his or her parent aren't subject to Federal Unemployment Tax Act (FUTA). Generally, income tax withholding will apply to a child's earnings with some exceptions, such as, for payments for domestic work in the parent's home, or for work other than in a trade or business and are less than $50 in the quarter or the child isn't regularly employed to do such work.

Covered services of a child or spouse.

The wages for the services of a child or spouse are subject to income tax withholding as well as social security, Medicare, and FUTA taxes if he or she works for:

• A corporation, even if it is controlled by the child's parent or the individual's spouse;
• A partnership, even if the child's parent is a partner, unless each partner is a parent of the child;
• A partnership, even if the individual's spouse is a partner; or

• An estate, even if it is the estate of a deceased parent.

In these situations, the child or spouse is considered to work for the corporation, partnership, or estate, not you.

Parent employed by son or daughter.

When the employer is a son or daughter employing his or her parent, the following rules apply:

• Payments for the services of a parent in the son’s or daughter’s (the employer’s) trade or business are subject to income tax withholding and social security and Medicare taxes.
• Payments for the services of a parent not in the son’s or daughter’s (the employer) trade or business are generally not subject to social security and Medicare taxes.

Social security and Medicare taxes do apply to payments made to a parent for domestic services if all of the following apply.

• The parent is employed by his or her son or daughter.
• The son or daughter (the employer) has a child or stepchild (including an adopted child) living in the home.
• The son or daughter (the employer) is a widow or widower, divorced and not remarried, 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 the calendar quarter in which the service is performed.
• The child or stepchild is either under age 18 or, due to a mental or physical condition requires the personal care of an adult for at least 4 continuous weeks in the calendar quarter in which the service is performed.

Payments made to a parent employed by his or her child aren't subject to FUTA

IMPORTANT: We highly recommend readers to reach out to our firm first. Our clients never have to talk to the IRS, and tax resolution through our firm can save you money and time in the long run. You might also be eligible for other relief programs or get your penalties and interest forgiven. Reach out to our firm today for a consultation.  Click to make an appointment! Or call Toll-free 1-855-254-1892.