When a family member hires an individual, the tax consequences vary depending on the connection to that family member, and the business type. It is critical that individuals and employers know their tax status. Here’s what you should know:
Married people in business together
- A qualified joint project whose sole participants are a married couple filing a joint return is not considered a partnership for federal income tax purposes.
- Anyone employed by their spouse is classified as an employee if the first spouse controls management choices for the company and the second spouse is directed by the first spouse.
- Income earned by a spouse is susceptible to tax withholding, as well as Social Security and Medicare taxes, but not to FUTA tax.
Children employed by their parents
If the company is a sole proprietorship or a partnership in which both owners are the child’s parents:
- Payments made to any age child are liable for income tax withholding.
- Wages earned by a child above the age of 18 are liable for social security and Medicare taxes.
- Amounts paid to a child above the age of 21 are subjected to the Federal Unemployment Tax Act.
If the company is a corporation, estate, or partnership in which one or none of the owners are the child’s parents:
- Regardless of age, payments to the child are subject to income tax withholding, social security taxes, Medicare taxes, and FUTA taxes.
Parents employed by their child
If the company is a sole proprietorship run by the son or daughter:
- Payments made to the parents from the child are subject to income tax withholding, social security as well as Medicare taxes.
- Payments made to the parents are not subject to FUTA tax, regardless of the nature of the services supplied.
If the company is a corporation, partnership, or estate:
- Income tax withholding, social security taxes, Medicare taxes, and FUTA taxes apply to wages paid to the parent.
If a parent provides services to their child but does not work in the child’s trade or business:
- Payments made to the parent(s) are not subject to social security or Medicare taxes unless the services are for domestic purposes and numerous additional conditions are met.
- Payments for parental services are not subject to FUTA tax, regardless of the nature of the services supplied.
Many employees work for a close relative, whether it’s a child assisting at their parent’s store or a couple establishing a business together. If you fall into this category, your tax status may be more complex than you realize. If you need assistance understanding how your employment condition impacts your taxes, please contact the office.