Paying Your Family

Understanding your tax situation is always important for both taxpayers and employers. Employee’s tax situation changes when working with a family member, whether it be spouses running a business together or a child working at a family business. The tax implications depend on the relationship of the family members and the type of business.

Married people in a business together

Wages for someone who works for their spouse are subject to income tax withholding, Social Security and Medicare taxes, but not FUTA tax if they are organized as a business (filing Schedule C on their 1040 tax return) and not a corporation, estate or partnership.

Children Employed by their parents

In the case of a child working for their parents’ sole proprietorship or a partnership of both parents, the child’s tax situation depends on the age of the child.

• A child of any age is subject to income tax withholding
• Children 18+ are then subject to Social Security and Medicare taxes
• Wages paid to a child 21+ become subject to Federal Unemployment Tax Act (FUTA)

If however, the business is instead a corporation, estate, or a partnership in which only one or none of the partners are the child parent then the child’s wages are subject to all the above except FUTA taxes regardless of their age.

Parents employed by their child

The tax implications of the parents’ wages depend on the business type.

• If the business of the child is a sole proprietorship the parents’ wages are subject to income tax withholding, Social Security and Medicare taxes, but not FUTA tax.
• If the business is a corporation, partnership, or estate then the parents’ wages are subject to income tax withholding, Social Security and Medicare taxes, and FUTA tax.

• If the parent is performing nondomestic services for the child but not for the child’s business then the parents’ wages are not subject to Social Security and Medicare taxes. The wages are not subject to FUTA tax regardless of the services provided.

If you would like to learn more or to set up a consultation call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730.

The above information is of a general nature only and should not be relied upon for specific situations.