TLDR: When someone is employed by a family member, the tax implications depend on the relationship and the type of business
Many people work for a family member, whether it’s a child helping out at their parent’s shop or spouses running a business together. Whether if you are an employer or employee, it is crucial for taxpayers to understand their tax situation and stay in compliance.
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.
If you are unsure about your tax obligations, give us a call at (720) 712-7724 or book a FREE consultation using the link: https://calendly.com/rpfs/consult-with-ea
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