There are many advantages in hiring family members for your business. From passing down your company’s legacy to various tax benefits, there are multiple reasons small businesses today choose to employ relatives. However, before you choose to hire, it is important to note how bringing on board different family members may affect your business.
Note that when discussing payroll taxes, in this blog, we are referring to federal guidelines only. Be sure to check with your state to see which taxes would apply.
Hiring Your Spouse
If you are considering hiring your spouse as an employee, there are a few important items you should note. The IRS considers a spouse an employee when one spouse is the individual controlling the business, while the other spouse follows directions from the first spouse. When a sole-proprietorship, your spouses’ wages would be subject to payroll taxes, similar to any other employee. The only exception is that you do not have to pay FUTA unemployment taxes for them.
If you choose to run your business with your spouse and you have equal roles, then your spouse would be considered your partner. This means you may need to file as a partnership. However, if there are no other partners besides yourself and your spouse, then you may not need to file this way. As long as you and your spouse file a joint tax return, are the only owners of the business, actively participate in your company, and the business isn’t registered as a legal entity such as a corporation, limited liability company (LLC) or a partnership, then you do not have to file as a partnership.
If you own an LLC, depending on the state you live in, you may have the option to allow your spouse to work for no pay. You can also choose to pay your spouse in tax-free fringe benefits such as health insurance. This means you do not have to pay payroll taxes or file a W-2 for them. If you choose this option, please note that you will need to keep documentation proving that your spouse is receiving these benefits as compensation for work performed. Besides having them as an employee, you also have the option of hiring them as an independent contractor. Whichever you choose, hiring your spouse can help lower your company’s net income as well as reduce your tax obligations.
Hiring Your Children
You may also wonder if you can hire your children. Yes you definitely can, but it is important to know that your business may be in the spotlight of the IRS and your state’s Department of Labor by doing this. This means that you will need to document the work your children are doing for your business. Compensation needs to be reasonable for work performed, and should be age-appropriate.
If your business is a sole proprietorship or a partnership where your spouse is your partner, then children under 18 years old are not subject to Social Security and Medicare Taxes. Children who are under 21 years of age are also not subject to the FUTA tax. However, it is important to know that income tax withholding applies to all working children no matter how old they are. If only one of the partners is a parent of the child, then their wages will be subject to Social Security, Medicare, FUTA as well as income tax withholding. This is also the same for businesses that are a C or S Corporation.
Hiring Your Parents
If you are interested in hiring one of your parents then the IRS states that their wages will be subject to income tax withholding, Social Security and Medicare taxes, but not FUTA taxes.
Hiring Family as Contractors
If you choose to hire your family as contractors then you will not have to pay payroll taxes for them. However, it is important to understand who should be considered an Independent contractor and who should be an employee. Contractors are generally hired generally for a specific project or for a certain amount of time. The IRS classifies employees as those whose work is controlled by their company or are considered a vital asset to their business. Prior to hiring a relative as a contractor, it is first important to understand if they fall within the IRS’ definition. And be sure to check your state regulations as many have more stringent guidelines than the IRS.
If you would like additional information on how hiring on a relative may impact your business, please contact us today at 310-534-5577 or [email protected].
