Payroll Taxes for Family Members Who Work in Your Business

When your spouse and children work in your family business, and you decide to pay family members salaries or wages, the payroll taxes may be different than if they worked for another employer. As indicated by the IRS, children under 18 who work for their parents are not subject to social security and Medicare (FICA) taxes if the business is a sole proprietorship or a partnership in which the partners are the children's parents. And payments to a child under 21 who works for his or her parents are not subject to federal unemployment tax (FUTA). The child's wages would always be subject to federal income tax withholding, regardless of age.

A child's wages would be subject to FICA tax if the family business is set up as a corporation or a partnership if only one of the parents is a partner. And the business as the employer would be liable for its corresponding portion of the FICA tax.

If the situation is reversed and a child operates a business and employs a parent, the parent's earnings are subject to federal income tax and FICA withholding, but not federal unemployment tax.

If one spouse is employed by the other, the spouse's salary or wages are subject to federal income tax withholding and FICA tax, but not federal unemployment tax. But if the business is a corporation or a partnership, even if the person's spouse is a partner, the pay would also be subject to federal unemployment tax.

A husband and wife business would normally be considered a partnership for federal income tax purposes. But if one spouse controls the business and the couple files a joint return, they could report the earnings from the business and pay the self-employment tax under the name of just one spouse. Or, if both spouses materially participate in the business they could choose to treat the business as a joint venture, with each spouse reporting his or her share of net income from the business and the corresponding self-employment tax.

As pointed out in the Business Owner's Toolkit, if you hire siblings or other relatives in your family business, they are subject to the same income and FICA tax withholding and unemployment taxes as any other employees outside the family would be.

Manny Davis in an article for All Business, mentions some of the tax advantages of hiring family members. Since children under age 18 are not subject to FICA tax, the business does not have to pay its matching portion of the FICA tax. And depending on your respective tax brackets, by paying your children salaries or wages you are in effect shifting family income to a lower tax bracket since the business can claim a tax deduction for compensation paid to employees, including children.

Sources:

Family Help, IRS

Family Members and Payroll Taxes, Business Owner's Toolkit