The tax benefits of hiring family members
Whether it’s saving for retirement or reducing the family’s total tax bill, hiring family members can seem like an attractive option to many taxpayers. But there may be important considerations, such as employee/contractor classifications, payroll, and other miscellaneous taxes.
“According to the IRS, hiring family members is one of the many benefits of owning and operating your own business,” said Kris Yamano, partner at Crewe Advisors in Scottsdale, Arizona. “If done correctly, hiring a spouse, parent, sibling or child can allow a family to increase their retirement savings and potentially reduce overall tax liability.”
“Getting a family member on the payroll can turn highly taxed income into non-taxable or low-taxed income, and you can even contribute to your child’s retirement plan,” Gail Rosen, CPA, told Martinsville, NJ. “You can also save self-employment taxpayer dollars by transferring your earnings to a child; services provided by a child under 18 while employed by a parent are not considered employment for the purposes FICA tax.
The actual tax savings depend on the relationship and age of the employee and the business/ownership structure, said Kathleen Stewart, senior strategist at BNY Mellon Wealth Management. The classification of employee versus independent contractor is also important.
Statistics vary, but most experts agree that family or controlled farms make up a large part of the country’s business base. Passing the baton in these businesses has created misconceptions over the years, often general ones about tax benefits.
“The tax benefit is nominal and not necessarily a reason to hire a family member,” said Gerry Clancy, CPA and partner at Armanino LLP in San Ramon, Calif. “You could get tax relief by getting an ordinary payroll deduction. At the owner level, a higher tax rate than the ordinary tax rate at the child level. The main employment benefit of family members would generate earned income and provide the potential for retirement savings, especially for younger people. [or] teenagers. »
Some of the biggest misconceptions include that you can even hire a family member in the first place. “You just have to make sure they’re a bona fide employee, meaning they add value to the company for a reasonable salary,” Yamano said.
She added that not all family members are equal when it comes to working in the family business: spouses and children may be treated differently from a tax perspective, and children of Different ages can also be treated differently from each other.
Clancy said there are a few tax implications for hiring family members:
• Employ your spouse: If one of the spouses controls the company and directs the other, then it is a simple employee/employer relationship and there are no tax advantages on the payroll; salaries will be subject to all taxes.
• Employ your child: Under 18s are not subject to FICA or FUTA taxes; 18 to 21 is subject to FICA but not FUTA. Both taxes apply to people over the age of 21.
• Employ your relative: These salaries are not subject to FUTA tax.
FUTA (unemployment) tax exempts income paid to a child under the age of 21 while employed by their parent who files as a sole proprietor, single member LLC, or as a partnership solely owned by parents, Rosen added.