Famiily Payroll

What is best for a small business or trade that wants to employ a spouse, child or
parent? Let's look at each situation.

Your spouse: He or she would be subject to withholding for income tax purpose, plus
social security and Medicare taxes, You do not have to pay the Federal Unemployment
tax, currently $56.00 yearly, per employee on form 940, unless the spouse is working for a
Corporation. In that case the company must deduct FUTA. The exception is in the case of
working in a private home in a domestic capacity. Your spouse would then receive a W-2
from the trade or business and the income would be placed on the individual return as
income, while the business would take the wages as a deduction.

Your child: You will have to look your childs age and your type of business. Is he or she
under 18? If so, the funds paid for services are not subjected to social security or
Medicare taxes, as long as the child is working for a sole proprietor or a partnership where
the parent is a partner. The child's wages are not subject to FUTA (Federal
Unemployment) up to the age of 21. The reasoning for the break on FUTA for the spouse
and children under the age of 21 is that they will be on the parent's Income Tax Return.
What about a child working for a Corporation? In that case, you will have to deduct
payroll taxes from the child's wages.

Your parent: Your parent is subjected to withholding, social security and Medicare taxes
for wages paid to him or her, unless it is not pay for services for a trade or business (i.e.
domestic service in most cases). Federal Unemployment taxes do not apply to a parent
employed by his or her child.

Bottom line: Look at the laws and your type of trade or business. Decide if it is cost
effective for the business to employ that spouse, child, or parent. Would it cost too much
in taxes to employ that relative? Is there a need for the business to employ the related
person? Does the person in question need the income or social security benefits for the
future?