James R. Kay,
Helping you keep more of what you earn !
Putting Family Members on the Payroll
In many closely held businesses, the owner’s spouse or children may help out by working in the business from time to time.
Does it make sense to put your spouse or child on your company’s official payroll (regular paychecks, tax withholding, W-2 forms, etc.)?
Self-Employed - The answer may be yes if you are self-employed and are hiring your child who is under age 18. Wages paid by a self-employed parent to a child under 18 are exempt from FICA (Social Security and Medicare) tax. If you are self-employed and employ your spouse, the wages you pay are subject to FICA tax. However, if you are self-employed and employ your spouse, you may be able to adopt a health care reimbursement plan that can cover the whole family. This type of plan can make all of your medical expenses deductible against your business income and reduce your FICA tax and income tax.
A child 18 or older hired by a self-employed parent is subject to FICA.
Corporations - If you operate your business as a corporation, there is no FICA exemption for children. Your corporation must withhold and pay FICA tax on all employees, including yourself, your spouse, and your children. However, wages paid to a child can be offset by the child’s standard deduction. This can reduce or eliminate any income tax on those wages. This does not preclude the parent from claiming the child as a dependent.
Wages paid to your child are income tax deductible by your corporation and taxable to your child. Your child has a standard deduction ($5,000 for 2005) that can be used to offset his wage income. Wages up to $5,000 paid to your child essentially become income tax free.
Of course, there are other factors to be taken into account if you are considering making your spouse or child a formal employee. For example, if you hire your spouse, you may qualify for a tax credit for any childcare expenses you incur.
Please contact us if you want to discuss whether family employment makes tax sense in your particular situation.
Caution - Content on this page is general in nature. More specific rules and limitations may apply to your situation. Always seek the advice of a tax professional before making important financial decisions.