Hey there, small business owners! Let’s chat about something that might be on your radar: hiring family members. It sounds simple, right? Keep it in the family, build the business together – but there’s a catch. The tax rules for family employees aren’t your standard fare. So, buckle up, and let’s dive into this family-business-tax roller-coaster!

Spouses Teaming Up in Business

First off, if you’re thinking of hiring your better half, there are some things to know. When you put your spouse on the payroll, their wages are subject to the usual income tax withholding and FICA taxes (that’s Social Security and Medicare for the uninitiated). But, here’s a twist: they usually don’t have to pay the Federal Unemployment Tax Act (FUTA) tax. However, if your business is a corporation or partnership, FUTA jumps back into the picture.**

Now, for a little tax perk: If your spouse is working for you, and you’re self-employed, you can tap into IRC §105 medical reimbursement plans. These plans are off-limits if you’re flying solo, but with your spouse on board, it’s a whole different story. They cover medical expenses for your spouse, the family, and – surprise – you too!

Parent-Child Business Ventures

Moving on, what about hiring dear ol’ mom or dad? Their wages are usually subject to income tax withholding and FICA, but not FUTA. But here’s an interesting scenario: if you’re like Paulina, a travel writer who’s hardly home and hires her retired mom to manage home affairs, the wages paid to her mom dodge FICA taxes since they’re for personal tasks, not business-related.

However, if Paulina decided to make her mom the business manager, then FICA would apply, as it’s a direct business role. Also, a little side note for those hiring parents to provide domestic services: FICA taxes kick in under specific conditions, like if the parent is taking care of a child with special needs.

Kids on the Payroll

Now, let’s talk about your mini-me’s. When you hire your kids, their income is taxed in their hands, not yours. Children under 18 working in your business get a break from FICA taxes, and if they’re under 21, FUTA taxes too. But this tax holiday only applies if you’re a sole proprietor or your business is a certain kind of partnership. Despite these breaks, their wages are still fair game for income tax withholding.

Remember, all this tax magic works only if the work your family does is legit – real roles, real work. Make sure they’re doing genuine work, getting properly paid, and treated like any other employee. This includes filling out forms, taking payroll deductions, and being on a proper work schedule.

Some Tax Tricks and Tips

Hiring your family isn’t just about keeping it in the clan; it’s a smart tax move too. Legitimate wages to family members are deductible for the business, and this income doesn’t get taxed on your end. For your kids, this could mean paying taxes at a lower rate compared to yours.

But, a heads-up if you’re paying wages to a parent or spouse who’s on Social Security benefits. Their wages could impact their Social Security checks if they’re below the full retirement age. Once they hit that age, though, they can earn without affecting their benefits.

Wrapping It Up

 So there you have it, folks – the ins and outs of hiring family in your small business. It’s a great strategy, with some tax perks and quirks. Just make sure you’re keeping things above board with real work and proper pay. Navigate these tax waters wisely, and your family-run business could be smooth sailing! For more more information or any consultation visit our website: https://www.bastacpa.com/