As a business owner, when it comes to hiring your parents or children, there are important considerations beyond family dynamics that you need to keep in mind. One of these considerations is employment taxes. Understanding the tax implications of such arrangements can help you navigate the hiring process more effectively and ensure compliance with tax regulations. Let’s delve into the key points related to employment tax when hiring loved ones.
Key Points For Employment Tax When Hiring Loved Ones
When a child works for a parent’s sole proprietorship or a partnership where each partner is the child’s parent, the payments made for the child’s services are subject to income tax withholding. However, the treatment of these payments regarding employment taxes depends on the age of the child. Payments for the services of a child under the age of 18 are not subject to social security and Medicare taxes. However, once the child turns 18, these payments become subject to those taxes. Similarly, payments for the services of a child under the age of 21 are exempt from Federal Unemployment Tax (FUTA), but payments to children over 20 are not.
In all other scenarios, such as when the child works for the parent’s corporation, nonparental partnership, or estate, the employer must treat the child’s wages just like any other employee’s wages. This means that income tax withholding, as well as social security, Medicare, and FUTA taxes, apply. SUTA may vary from state to state.
The tax situation changes when a parent works for their child’s sole proprietorship. In this case, payments for the parent’s services are subject to income tax withholding, as well as social security and Medicare taxes. However, they are not subject to FUTA tax.
For other situations where the child’s entity employs the parent, the parent’s wages are treated in the same manner as any other employee’s wages, meaning that all applicable taxes must be withheld and paid.
There is an interesting exception to the employment tax rules when it comes to parents performing nonbusiness services. If you hire your parent to take care of your child or stepchild (grandchild) living in your home, and you are unable to care for the grandchild due to a mental or physical condition for at least four continuous weeks, payments made to your parent for these services are not subject to social security and Medicare taxes. This exception applies when the grandchild or step-grandchild is under the age of 18 or requires adult care for at least four continuous weeks due to a mental or physical condition. It’s important to note that payments for childcare that enable you to work are exempt from social security and Medicare taxes.
In addition, payments made to a parent for their personal services, unrelated to childcare, are not subject to FUTA tax.
In conclusion, it is crucial to understand employment tax when hiring loved ones. The tax treatment varies depending on factors such as the relationship between the employer and the employee, the age of the child, and the nature of the services provided. By familiarizing yourself with these rules, you can ensure compliance with tax regulations while managing the payroll of your family members effectively. If you have any further questions or need assistance navigating these tax considerations, please don’t hesitate to reach out to us.