Tax Treatment for Kids Working in the Family Business

What kind of business is a mom-and-pop operation? It’s probably not a question you pondered when you dreamed of going into business.

Suppose you employ your child. How is this handled so that you are in compliance with IRS rules and regulations? Payments for a child under age 18 aren’t subject to Social Security or Medicare taxes if the business is a sole proprietorship or a partnership where the only partners are the child’s parents. Payments to a child under 21 aren’t subject to FUTA. Payments are subject, however, to income tax withholding, regardless of your child’s age.

Here are the circumstances under which you would have to withhold income taxes and Social Security, Medicare, and FUTA taxes:

• If the work is being done for a corporation, even if it’s controlled by the worker’s parents
• If the work is accomplished for a partnership, even if the child’s parent is a partner, unless the only partners are the parents of the child

What if the parent is employed by the child? Wages for a parent are subject to income tax withholding as well as Social Security and Medicare taxes. But they are not subject to FUTA taxes.

Employees complete Form W-4 so that the employer can withhold the correct federal income tax from the pay.

There are no laws against hiring family members in private business, but having them work in your business presents some unique tax and employment situations. Contact R&A if you need guidance in this situation.