You see it all the time: businesses marketing themselves as being family owned and operated for multiple generations. This is a good thing, by the way. Small business is the bedrock of the U.S. economy in 2016 just as it has been for generations. Small business also accounts for the majority of jobs in America.
One of the advantages of operating a family-owned business is the opportunity to employ family members. Those family members have the privilege of being an active participant in creating something that can be passed down from one generation to the next, providing income for multiple generations.
As for taxes and reporting, family-owned businesses should remember that employed family members are still subject to many of the same rules that apply to other employees. Family members do not get a lot of special treatment in this regard.
Hiring a child under the age of 18 is not a problem as long as parents adhere to federal and state child labor laws. In terms of a child's income, it is not subject to Social Security or Medicare taxes as long as the business is operated as a sole proprietorship or as a partnership in which each partner is a parent of the child. Income taxes still apply.
Once the child turns 18, he or she is considered a legal adult for tax purposes. All the child's income would then be subject to income, Social Security, and Medicare taxes. The tricky part is determining how that child is classified. Some companies hire adult children as regular, salaried employees while others make them partners or treat them as contractors.
A child's income is fully taxable if the employer is a corporation, an estate, or a partnership in which one or more of the partners is not the child's parent. If you are a small business owner and are confused by all of this, a payroll service provider can help you make sense of it.
Hiring a Spouse
Hiring a spouse is no different than hiring any other adult from the perspective of collecting and paying taxes. Regardless of how a company is structured, payments made to spouses are subject to income, Social Security, and Medicare taxes. FUTA does not apply, though.
Again, this can get confusing when it comes time to classify how a spouse is employed. In the end, it does not matter whether the spouse is a salaried employee or an independent contractor, taxes still have to be paid one way or the other.
Hiring a Parent
Lastly is the question of hiring parents. In a traditional small business scenario, parents are treated the same as spouses and other non-family employees. In other words, all wages paid to parents in exchange for work that directly benefits the small business are subject to the usual taxes – income, Social Security, and Medicare. FUTA is an exception here as well.
If parents perform services that do not directly affect the business itself, but for which they are paid, Social Security and Medicare taxes may not apply. For example, hiring parents to provide daycare before and after school would generate income that is subject to income taxes but not Social Security and Medicare.
It is a good idea for all family businesses to hire accountants and/or payroll services rather than trying to do things themselves. There are a lot of different nuances involved with hiring family members that could cause problems if income and taxes are not reported correctly. Thankfully, you can partner with a payroll provider who will act as your checks & balance. We can help ensure you are compliant with all rules an reporting properly.