Are you employing a family member? Here is what you should know about your payroll tax obligations in the United States of America?
The tax implications of employing a family member may differ from the tax implications of employing an unrelated worker. They depend on the relationship between you and the family member and the type of business that you’re running.
YOU’RE IN BUSINESS TOGETHER WITH YOUR SPOUSE
Scenario 1: you started a venture with your spouse
Your joint venture may not be considered as a Partnership for federal tax purposes if:
- You and your spouse are equal partners of the joint-venture,
- Only the two of you are the owners,
- You file your U.S. Individual Income Tax return jointly.
In that case, your spouse’s compensation is subject to self-employment tax.
Scenario 2: your spouse is working for you
- Your spouse is considered as an employee if:
- You’re making the business management decisions, and
- Your spouse is working under your direction and supervision.
In that case, your spouse’s compensation is a salary and is subject to income tax withholding, social security tax, and Medicare tax. However, you don’t have to make Federal unemployment contributions (FUTA).
YOUR CHILD WORKS IN YOUR COMPANY
If your child works in your company, the tax and social obligations depend on the configuration you are in.
Your business is a sole proprietorship or a partnership in which you and your spouse are partners.
Your payroll tax obligations vary depending on your child’s age:
- Between 18 and 20 years old: his or her salary is subject to income tax withholding, social security tax, Medicare tax.
- At least 21 years old: his or her salary is subject to income tax withholding, social security tax, Medicare tax and unemployment insurance contributions.
Your business is a corporation, an estate, or a partnership in which you or your spouse are partners or neither of you is a partner.
Regardless of his or her age, your child’s salary is subject to income tax withholding, social security tax, Medicare tax and unemployment insurance contributions.
YOUR PARENTS WORK FOR YOUR COMPANY
If your parents work in your company, the tax and social obligations also depend on the configuration in which you are:
- Your business is a sole proprietorship: their compensation is subject to income tax withholding, social security tax, Medicare tax. However, regardless of the service that they provide, their compensation is not subject to unemployment insurance contributions.
- Your business is a corporation (even if you have control), an estate, or a partnership (even if you’re a Partner): their salary is subject to income tax withholding, social security tax, Medicare tax and unemployment insurance contributions.
YOUR PARENTS PERFORM SERVICES FOR YOU, BUT NOT FOR YOUR TRADE OR BUSINESS
Your parents perform domestic services
Their compensation is subject to social security tax, Medicare tax if you meet each of the following requirements:
- You have a child or stepchild living in the home,
- You are a widow or widower, divorced, or living with a spouse, who because of a mental or physical condition, can’t care for the child or stepchild for at least four continuous weeks in a calendar quarter, and
- The child or stepchild is either under age eighteen or requires the personal care of an adult for at least four continuous weeks in a calendar quarter due to a mental or physical condition.
However, your parents’ compensation for domestic services is not subject to unemployment insurance contributions.
Your parents don’t perform domestic services
Their compensation is not subject to social security tax, Medicare tax.
In 2021, there were 83.2 million families in the United States of America. In three families out of four at least one person of the family was employed. Two families out five included children under age eighteen.