If you’re a small business owner, there are some tax advantages you might be unaware of that can lower the overall tax bill for your family, if you decide to employ family members in the business.
It’s commonplace for multiple family members to work in a small business, and as the owner, perhaps you’re training up the next generation to take over one day.
For your children under 18, one possible way to cut your taxes is through the Federal Income Contributions Act (FICA) payroll tax exemption. You don’t have to pay the FICA tax for children if the business is a sole proprietorship or a partnership with only parents as partners.
Additionally, children under 21 (and other family members), may also be exempt from Federal Unemployment Tax Act (FUTA) payroll taxes.
As with wages to non-related employees, those paid to your children and other relatives can be deducted as a business expense, reducing your taxable income.
Other costs associated with employing relatives also have potential tax advantages – for example, if a relative who is an employee participates in the company health insurance or retirement plans.
You can also lower your family’s overall tax liability through income splitting, a method where a higher income family member shares their income among family members who are in a lower income tax bracket to take advantage of lower tax rates and reduce the amount of income tax
An example of income splitting is when a parent in a higher tax bracket hires their child in a lower tax bracket and pays them a wage. The wages paid would lower the parent’s taxable income and be taxed to the child at a lower rate.
Remember these three rules when employing family members, particularly those under 18:
(1) The work being performed must be “ordinary and necessary”, (2) You must pay a reasonable amount for the work being performed, and (3) Don’t run afoul of child labor laws.
Do you have tax questions related to hiring family members for your small business? We can help you evaluate your overall tax picture. To get started, call us at 706-632-7850 or email our office manager Kimberly Mortimer at email@example.com.