KIM: Hello.
My name is Kim with the IRS.
Today, I´m going to talk about
the tax implications
of employing family members
at your small business.
The tax rules
for family employees
may differ from other employees
depending on
the family relationship
and the business entity type.
Let´s start with a child
working for a parent.
Payments
for the child´s services
are subject
to income tax withholding,
regardless of age.
However,
if the child is under 18
and working for a parent
in a trade or business,
payments
are generally not subject
to Social Security
and Medicare taxes.
And if the child is under 21,
those payments
are not subject to FUTA.
That´s unemployment tax.
However, if the business
is structured
as a corporation, an estate,
or a partnership where only one
of the parents is a partner,
then you must withhold
all of these taxes
from the child´s wages.
Now, what if a parent
is working for their child?
If the child employees the
parent in a trade or business,
then the child withholds
income tax,
Social Security,
and Medicare taxes.
Wages paid to the parent
are not subject to FUTA tax,
regardless
of the type of services,
but if your parent works for you
in some other capacity
not related to your business,
Social Security
and Medicare taxes
do not apply
to the wages paid to them.
But they do apply
to some domestic services
where certain conditions exist.
Our final situation
would be a spouse
employed by the other spouse
in a trade or business.
These wages are subject
to income tax withholding
and Social Security and Medicare
taxes but not FUTA tax.
There are exceptions.
If the spouse works
for a corporation,
even if it´s controlled
by the individual´s spouse,
or a partnership,
even if the individual´s spouse
is a partner,
in those cases,
FUTA tax would apply, too.
The IRS has many resources
to help you understand
all these nuances in the tax law
when it comes
to employing family members.
You can go to IRS.gov
and enter "Employing Family"
or "Business with Employees"
in the search box.
And you can also download
Publication 15, Circular E,
Employer´s Tax Guide,
for more comprehensive
information.