Are You Employed in the Family Business – Check Out These Tax Implications…

When a family member employs someone, the tax implications depend on the relationship and the type of business. Taxpayers and employers need to understand their tax situation. Here is what to know:

Married People in Business Together

• Generally, a qualified joint venture whose only members are a married couple filing a joint return isn’t treated as a partnership for federal tax purposes.
• Someone who works for their spouse is considered an employee if the first spouse makes the business’s management decisions and the second spouse is under the direction of the first spouse.
• The wages for someone who works for their spouse are subject to income tax withholding and Social Security and Medicare taxes, but not to FUTA tax.

Children Employed by Their Parents

If the business is a parent’s sole proprietorship or a partnership in which both partners are parents of the child:

• Wages paid to a child of any age are subject to income tax withholding.
• Wages paid to a child age 18+ are subject to social security and Medicare taxes.
• Wages paid to a child age 21+ are subject to Federal Unemployment Tax Act

If the business is a corporation, estate, or a partnership in which one or no partners are parents of the child:

• Payments for services of a child are subject to income tax withholding, social security taxes, Medicare taxes, and FUTA taxes, regardless of age.

Parents Employed by Their Child

If the business is a child’s sole proprietorship:

• Payments for services of a parent are subject to income tax withholding, social security taxes, and Medicare taxes.
• Payments for services of a parent are not subject to FUTA tax regardless of the type of services provided.

If the business is a corporation, a partnership, or an estate:

• The payments for the services of a parent are subject to income tax withholding, social security taxes, Medicare taxes, and FUTA taxes.

If the parent is performing services for the child but not for the child’s trade or business:

• Payments for services of a parent are not subject to social security and Medicare taxes unless the services are for domestic services and several other criteria apply.
• Payments for services of a parent are not subject to FUTA tax regardless of the type of services provided.

For information on Taxes click here: https://perlingerconsulting.com/post/march-2023-individual-tax-due-dates or go directly to the IRS website for additional information: https://www.irs.gov/

This blog is meant for educational purposes only. Articles contain general information about accounting and tax matters and is not tax advise and should not be treated as such. Do not rely on information from this website as an alternative to seeking assistance from a certified tax professional. Perlinger Consulting partners with certified tax professionals to assist our clients.