Hiring a family member: Tax matters for spouses and kids
Is it a dream of yours to go into business with or work with a family member—a spouse, child, or otherwise? While hiring family members doesn’t make taxes exempt, you should know before taking on family members as employees that there are tax implications when work and family coincide.
When families go into business together, certain employment and tax treatments apply differently than they would a traditional, non-familial working relationship. For instance, the taxes you withhold and report differ from a traditional employee, depending on your familial relationship.
Here are a few examples of family business tax treatments:
Family business tax example #1: Spouses in business together
If you are in an unincorporated business with your spouse and share in the profits and losses;
Then, you are considered partners even if you don’t have a formal partnership agreement. You should report income on a partnership tax return, Form 1065, rather than on a Schedule C in the name of just one spouse. Your shares of partnership income and expenses are “passed through” to each person individually on a Schedule K-1.
If you and your spouse are eligible for qualified joint venture treatment;
Then, you and your spouse may elect to be a qualified joint venture instead of a partnership.
Businesses owned by spouses as co-owners and that aren’t in the name of a state law entity, such as a limited partnership or limited liability company (LLC), are eligible for the qualified joint venture election, according to the IRS. Each spouse should report income on a Schedule C.
Family business tax example #2: One spouse is employed by another
If you employ your spouse;
Then, your spouse’s wages are subject to income tax withholding and Social Security and Medicare taxes but not to the Federal Unemployment Tax Act (FUTA).
Family business tax example #3: Your child is employed by you
The benefit of hiring a child into a family-owned business includes introducing them to the ropes of the business world and carrying on the business for many generations.
If your child (who is under 18) is employed by the family business and you are a sole proprietorship or a partnership in which each partner is a parent of the child;
Then, payments for the services of a child aren’t subject to Social Security and Medicare taxes. Also, if the child is under 21, wages aren’t subject to FUTA.
Remember: Your child’s work must be legitimate and the amount you pay them must be reasonable for the wages to be tax-deductible. You should check the rules of the state you reside in for how many hours children can work in non-agricultural jobs. Reference the Fair Labor Standards Act for information on limitations on the kinds of work children can perform.
Family business tax example #4: You are employed by a child
Now, let’s flip the scenario…
If you are employed by one of your children;
Then, your wages are subject to income tax withholding and Social Security and Medicare taxes but not to FUTA.
Is there a family tax credit?
Sometimes, clients ask us if they get a tax break related to hiring family members. Unfortunately, there is not a family tax credit for families working together.
But don’t be discouraged if you’re looking for ways to lower your business taxes. In fact, there are many small business tax deductions as a business owner.
Need help with hiring family members and taxes?
Navigating taxes for a family business can be tricky. Remember, you can always get help from one of our small business certified tax professionals. Whether it’s taxes, bookkeeping, or payroll, we can help your small business so you can get back to the business tasks you love.