Employing Family
Members
How Can I Reduce My Tax Burden?
If you are a business owner and you are short of workers this summer, hire
your children to help out. One of the key advantages to hiring your
children is that you will save on payroll tax. If your children are under
the age of 18, you are not required to withhold social security and
Medicare taxes from their wages, nor are you required to pay in the
employer's share. You are also not required to pay federal unemployment
tax on children's wages until they reach age 21.
This tactic will not work for all parents, however. Only self-employed
business owners can hire their children and avoid payroll taxes. This
includes businesses operated as a partnership, provided you and your
spouse are the only partners. If your business is incorporated, your
children will be employees of the corporation, not you. Therefore, the
exemption from payroll taxes does not apply and social security and
Medicare taxes will be due just as with any other employee.
You can also hire your spouse and save some tax dollars as well. If your
spouse is a bona fide employee of your partnership or sole proprietorship
and is paid a reasonable wage for the services performed, you can provide
health benefits and deduct the cost from your business income. This will
save you some self-employment tax. The health insurance policy
provided to your spouse, as an employee, can be a family policy, so your
children and you can be covered under that policy. The cost of the
health insurance policy is a business deduction, which reduces the net
income subject to self-employment tax.
If you employ your
spouse, you must pay Social Security and Medicare taxes for him or her.
The wages for the services of an individual who works for his or her
spouse in a trade or business are subject to income tax withholding and
Social Security and Medicare taxes, but not federal unemployment tax.
