Stay updated on all areas of tax filings and business processes affected by COVID-19

Learn more

Tax Issues when Hiring A Family Member

By: Jeremiah (Jerry) Murphy

July 1, 2022

Consider the following factors before choosing to hire a relative.

1. All relatives are not made equal

Employee relatives do not all share equal legal standing. The rules shift depending on the nature of your family relationship to the employee and the employee's age. Spouses are treated differently than children, and children are treated differently depending on their age,

We’ll consider the situation as a sole proprietor in this blog. Other rules will apply if you are a general partnership or a corporation. Spouses are subject to income tax withholding and Social Security and Medicare taxes; they are not subject to Federal Unemployment Tax Act (FUTA) taxes. In this regard, the proprietor and his or her spouse are considered a single unit.

The status of children employed by a parent varies based on their age. Children under the age of 18 are not subject to Social Security, Medicare, or FUTA taxes if the parents' business, assuming the parent is operating as a sole-proprietorship or a partnership where each partner is a parent of the child employed.  Children between the ages of 18 and 20 are treated like spouses — they are a part of the familial unit and are exempt from FUTA taxes only. Once a child reaches the age of 21, he or she is treated no differently than any other employee. At this point, children are subject to all the same withholding taxes as any other employee.

If a parent is employed by his or her child, the parent is subject to income tax withholding and Social Security and Medicare taxes on his or her wages but is not subject to FUTA taxes on them.

2. The tax implications can work in your favor

The so-called “kiddie tax” will not apply if a sole proprietor hires their child and the child earns less than that year’s standard deduction.  In 2022, the standard deduction is $12,950 because earned income isn’t subject to the kiddie tax.

Furthermore, a child who earns less than the standard deduction does not owe any federal income taxes. And the parent will still be able to claim the child as a dependent, too.

We recommend that if you are going to hire your child in your business, that you should consider a saving program for the child.  Since the money earned by the child is considered earned income, those funds can be contributed to an Individual Retirement Account.  We believe that the best choice for a retirement account in this case is a ROTH IRA.

3. Make sure they are up for the task

If are going to hire your child for your business, the new employee must do legitimate work that is age appropriate; just cutting a check without work is not the answer here.  We advise you to check your state’s employment laws to see what work your child cannot do because of their age; also, check to see if there are any exceptions that might apply.

And one other item to consider is that the rate of pay must be appropriate and reasonable considering the work that is involved. 

4. Summary

In summary, for the responsible business proprietor, hiring relatives is a viable option. Before you do hire a family member, we ask that you consider all of the factors; despite some potential drawbacks, getting family involved can prove a personally rewarding and financially enriching decision.

Naturally, you can call (707 292-8415) or e-mail us (jmurphy@mcn.org) directly about this topic.