If you have questions about the tax implications regarding employing family, then you’re in the right place! In our recent blog posts in the Business Taxes series, we’ve been discussing the different things you need to know about the business taxes associated with operating a business that has employees.
As we’ve mentioned in previous posts, the type of employees your business hires plays a large role in the IRS forms, paperwork and tax responsibilities that will be required of your business. The two main types of employee classifications are 1099 independent contractors and W-2 employees. In our blog posts Business Taxes: 1099 Independent Contractors and Business Taxes: Form 1099-NEC, we cover the basics about the tax responsibilities and paperwork required for 1099 independent contractors. In our more recent posts, we’ve been discussing the employment taxes, payroll taxes and other business tax considerations regarding employing W-2 employees.
As we’ve noted in one of our recent posts, Business Taxes: Employment Tax Withholdings for Part Time or Season Help, there may be extra conditions or exceptions in place by the IRS that are specific to only a few types of business, for instance, seasonal employers don’t need to file quarterly federal tax returns for quarters they don’t have a tax liability because they didn’t work. In this blog post, we’ll discuss some of the IRS intricacies that are involved when hiring an employee that is a family member.
Employment Taxes and Employing Family
As of January 31st, 2021, according to the IRS Page Family Help, “one of the advantages of operating your own business is hiring family members. However, employment tax requirements for family employees may vary from those that apply to other employees.”
Like we mentioned above, the IRS does have specific rules in place for scenarios you might not have considered, that’s why it’s great you’re doing some extra research on your own and you’ve found our blog!
Regarding children that are employed by their parents, the same IRS Page from the previous excerpt, Family Help (as of January 31st, 2021), continues on to say that “payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child. Refer to the “Covered services of a child” section below. Payments for the services of a child under age 21 who works for his or her parent in a trade or business are not subject to Federal Unemployment Tax Act (FUTA) tax. Payment for the services of a child are subject to income tax withholding, regardless of age.”
As you can see, the situation specified above is rather specific. To qualify to be able to not pay payroll and employment taxes (social security and Medicare taxes) for a child employee, the business must be a sole proprietorship owned by a parent, or a partnership owned by both parents and the child must be under 18. The excerpt also stipulates that regardless of age, the child is still subject to income tax withholding.
The IRS also states several situations where the services of a child employed by their parents are explicitly subject to employment taxes. According to the IRS Page Family Help, as of January 31st, 2021, “the wages for the services of a child are subject to income tax withholding as well as social security, Medicare, and FUTA taxes if he or she works for:
- A corporation, even if it is controlled by the child’s parent,
- A partnership, even if the child’s parent is a partner, unless each partner is a parent of the child, or
- An estate, even if it is the estate of a deceased parent.”
If you or your business have any questions about the intricacies of employing a family member and the related payroll and employment taxes, feel free to contact the team at Bullseye Tax Relief! We specialize in business tax resolution services and offer a free initial consultation to new clients so they can learn their options risk-free. Call us today to learn more!