This series of blog posts is designed to guide small business owners through some common tax planning considerations. Please reach out to the GYF Tax team to discuss your specific situation.
One benefit of owning your own business is the opportunity to provide family members with employment opportunities. In addition to the reward or being able to help your loved ones, hiring family members can offer potential tax saving opportunities. The specific tax advantages are determined based on the type of business involved, the family member’s age, and their relationship to the business owner.
Parents Hiring Children
Children employed by parents who are owners or partners in a business may have reduced payroll tax liability. If the parent owns a sole proprietorship or a partnership in which all the partners are the child’s parents, children under 18 years old are exempt from FICA (Federal Insurance Contributions Act) taxes, and children under 21 years old are exempt from FUTA (Federal Unemployment Tax Act) taxes. Additionally, children may be able to earn up to the annual standard deduction amount without owing federal income tax, assuming they have no other income and their wages do not exceed the standard deduction
Children Hiring Parents or Spouses
Parents and spouses who are employed by their child or spouse may also be exempt from certain taxes. In a sole proprietorship, parents/spouses hired by their child/spouse are exempt from FUTA taxes. Employees of a partnership or corporation do not receive this benefit.
Benefits & Compensation
Another perk to hiring family is being able to provide them with typical employee fringe benefits, such as health insurance, 401k plans, and life insurance. Contributing to a spouse’s 401k as an employer will also result in a personal benefit by increasing the amount of retirement money you can save as a couple.
The most important consideration when hiring family members is paying them reasonable wages for the work performed. Employing your children at your business can be an effective way to shift some income to an individual in a lower tax bracket, but this strategy should only be used if they are actively working for you and are being reasonably compensated for the work performed.
Final Thoughts
In general, hiring employees lowers a business’s tax liability given that salaries and wages paid decrease taxable income. However, hiring a family member can provide even more benefits because the relationship is already built, long-term commitment can be expected, and the family member likely already has knowledge of the family business and its values.
