There are no laws against nepotism (hiring family members) in private business, but having family members working in your business does present some unique tax and employment situations.
Hiring Family Members
In some cases, children must be treated differently for tax and work purposes, but for adults, everything you do for other employees, and every employment tax you pay for other employees, and every benefit you give to other employees should be the same for family members.
Treat family employees the same as other employees t prevents charges of favoritism and it keeps your business from being cited by federal and state agencies for violations of tax and employment laws.
Employment Taxes and Family Employees
Employment taxes include:
- Federal and state income taxes that must be withheld from the employee's pay.
- FICA taxes (Social Security and Medicare taxes) that must be withheld from the employee's pay and matched by the employer.
- Federal unemployment taxes (FUTA) that must be paid by the employer based on employee pay.
Child Labor Laws
Before you hire your child (or any child) to work in your business, review the federal and state child labor laws. Federal child labor laws restrict the hours of work, times of day, and types of work children may perform at different ages. For example, children under 18 are not allowed to operate dangerous equipment, and children under 14 are not allowed to work in any type of business.
Hiring and Paying Children
Before your children to work in your business, check on the various types of payroll taxes to see whether you must withhold and pay these. Payroll taxes for your children as workers depends on your business type. According to the IRS:
- If your business is a corporation, even if you control the corporation, all the money you pay your child is subject to payroll taxes.
- If your business is a partnership, all money paid to your children is subject to payroll taxes unless "each partner is a parent of the child."
Some things you should know about paying your children to work in your business and employment taxes for children:
- You don't have to pay FUTA (federal unemployment tax) on the wages of your children.
- If the business is 100% family-owned and it is not a corporation or partnership, no FICA tax (Social Security and Medicare) needs to be paid by the children or the business on the child's wages.
- Have each child complete all the new hire forms, including a W-4 form for withholding income taxes. If your child makes less than $800 a year the child may be exempt from taxes and no withholding is required.
- You must withhold income taxes from the pay of children. They may get it back if their total income is not large, but you must still withhold.
For All Family Employees
If a family member is working for you without pay, this section doesn't apply. For family members who are paid by your business, you must:
- Get a W-4 form from each family member at the time of hire and withhold federal income taxes based on the information on the W-4 form
- Withhold FICA taxes from family members and include family member pay when calculating FICA taxes your business owes
- Include family member pay in calculations for unemployment taxes and worker's compensation
- Pay overtime to family members in the same way as other employees, at 1 1/2 times base pay and after 40 hours in a workweek. That includes paying overtime to family members who are exempt and whose income is below the threshold for overtime payments.
If you pay for holidays or sick time or provide paid vacations for other employees, you must provide family members the same paid time off. If a family member qualifies for other benefits, such as your company health plan, you must include that family member in the group. In other words, family members who are employed by your company must be provided with all the benefits of other employees.
Hiring Your Spouse as an Employee
If your spouse is working for pay in your business, you must withhold federal income taxes and FICA taxes from pay. If you are self-employed (not a corporation or a partnership), your spouse's pay does not have to be included in your unemployment tax calculations. If your business is a corporation or a partnership, you must include that spouse's pay in unemployment tax calculations.
Confused? Check out this table for a simplified overview:
|Chid, Parent, or Spouse as Employee|
|Child Employed by Parent||Spouse Employed by Spouse||Parent Employed by Child|
|Federal Income Tax Withholding||Yes||Yes||Yes|
|FICA Tax Withholding||No, if under age 18* or if the business is 100% family-owned||Yes||Yes|
|FUTA Tax||No, if under age 21*||No||No|
*If the business is a corporation, estate, or partnership where only one parent is a partner, all taxes, including FICA taxes, must be withheld from the child's wages.
Your Spouse as a Co-Owner
If you and your spouse have an equal say in the business, neither of you is an employee, but you may be considered as co-owners for self-employment tax purposes and a partnership for tax purposes. Some husband-wife businesses may be considered as a qualified joint venture, which allows for more simplified reporting. The husband-wife business is more complicated than it might seem, so check with your tax advisor before starting a husband-wife business or paying business taxes for such a business.
Family as Household Help
The IRS regulations for withholding federal income taxes and FICA taxes and for FUTA tax liability are different if a family member is working as household help. See IRS Publication 926 - Household Employer's Tax Guide for more information.