Family businesses are a driving force in the US economy, with over 5 million family-owned companies nationwide.
Surprisingly, 35% of Fortune 500 companies are family-owned or controlled. These statistics highlight family businesses’ significant impact and enduring presence, showcasing their success and contributions to economic growth and job creation.
Hiring your children and family members in the business has many advantages for finances, taxes, and managing the business.
Tax Benefits Of Employing Your Children
Understanding the rules and exceptions is important when considering employing your children to work for your business.
Consider the following factors:
Sole proprietorship or LLC taxed as a sole proprietorship: If your business falls under these categories and your child is under 18, you may not be required to withhold or pay FICA or FUTA taxes on their wages.
Tax exceptions regarding age and the type of business: If your child is 18 or older and your business is either a sole proprietorship or a partnership, their wages may be liable for Social Security and Medicare taxes.
FUTA taxes do not apply to your child’s services if they are under 21. In the case of corporations, estates, and partnerships (except when each partner is a parent of the child), it is mandatory to deduct Social Security, Medicare, and FUTA taxes, regardless of the child’s age.
For corporations, estates, and partnerships (except when both partners are the child’s parents), it is mandatory to withhold Social Security, Medicare, and FUTA taxes, regardless of the child’s age.
Understanding these tax implications will help you make informed decisions when employing your children and ensure compliance with tax regulations. It’s always advisable to consult with a tax professional to navigate the complexities of tax requirements in such situations.
Does my child need a 1099 or a W-2 tax form?
When it comes to your child working for your business, understanding the tax implications is crucial. Here are the key points to consider:
If your child is classified as an employee:
- Please provide them with a W-2 form, treating them as regular employees.
- Deduct income tax from their paycheck.
- Cover the employer’s portion of Social Security and Medicare contributions.
If your child is treated as an independent contractor:
- Provide them with a 1099-NEC form if you’ve paid them $600 or more.
- Do not withhold income tax from their payments.
- They are responsible for self-employment tax.
- Remember, treating an employee as an independent contractor can have consequences.
Correctly classifying your child’s employment status is essential to avoid tax-related issues. Consult with a tax professional to ensure compliance and make informed decisions regarding your child’s role in your business.
Risks of Employing Your Children
Hiring your child without proper consideration can expose you to various risks and complications.
Tax benefits require legitimate work. Simply listing your child as an employee on paper won’t qualify for tax benefits. Genuine employment entails assigning them specific job responsibilities and documenting their hours and earnings like any other employee.
By being mindful of these considerations, you can navigate the potential pitfalls of hiring your child and foster a professional work environment within your business.
Seek Advice and Maximize Your Tax Benefits
Managing a small business comes with its fair share of challenges, and it’s not uncommon for family members, including children, to offer assistance. The good news is that having your children work for your business can bring tax advantages and other financial benefits.
Do you still need some advice regarding employing your children or other family members in your business? Talk to one of our advisors or tax specialists today to discuss your circumstances and tax benefits.