While hiring family members can offer tax advantages, but Be sure to Dot your I’s and Cross your T’s:

It’s hiring time for many business types this summer. With legions of working-age kids and college students out of school, and some spouses of business owners looking for part-time or seasonal work, companies may have a much deeper hiring pool to dive into this time of year.

There are some tax saving opportunities to look out for this summer, make sure not miss out on them by minding the IRS rules below:

Employing your kids
Children who work for the business of a parent are subject to income tax withholding regardless of age. If the company is a partnership or corporation, children’s wages are also subject to Social Security and Medicare taxes (commonly known as FICA taxes) and Federal Unemployment Tax Act (FUTA) taxes — unless each partner is a parent of the child.

However, substantial savings are possible for a business that’s a sole proprietorship or a partnership in which each partner is a parent of the child-employee. In such cases:

  • Children under age 18 aren’t subject to FICA or FUTA taxes, and
  • Children who are 18 to 20 years old are subject to FICA taxes but not FUTA taxes.

As you can see, substantial tax savings may be in the offing depending on your child’s age. Avoiding FICA or FUTA taxes, or both, means more money in your pocket and that of your child.

It’s also worth noting that children generally are taxed at lower rates than their parents. Moreover, a child’s income can be offset partially or completely by the child’s standard deduction ($13,850 for single taxpayers in 2023). If your child earns less than the standard deduction, income is tax-free for the child on top of being deductible for the business.

Hiring your spouse
When your spouse goes to work for your business, that individual’s wages are subject to income tax withholding and FICA taxes — but not FUTA taxes. Employers generally must pay 6% of an employee’s first $7,000 in earnings as the FUTA tax, subject to tax credits for state unemployment taxes paid. Thus, you’ll save the money you’d otherwise spend for a non-spouse employee’s FUTA taxes.

It’s important that your spouse is treated and compensated as an employee. When spouses run a business together, and they share in profits and losses, the IRS may deem them partners — even in the absence of a formal partnership agreement.

You also may reap some savings from hiring your spouse if you’re a sole proprietor and have a Health Reimbursement Arrangement (HRA). Your family can receive tax-free reimbursement from the business for medical expenses, and the business can deduct the reimbursements — reducing your income and self-employment taxes. HRA reimbursements aren’t subject to FICA taxes and the plan itself is a tax-free fringe benefit for your spouse. Do note, however, that this strategy isn’t available if you have other employees.

Handling it properly
Be mindful of the rules should you decide to hire a child or spouse, or both, Assign them actual job duties, pay them a reasonable amount, and keep thorough employment records (including timesheets as well as IRS Forms W-4 and I-9). Essentially, treat them as you would any other employee. Our firm can help you handle the situation properly.

If you have any questions regarding these rules or if this may be advantageous to you, please contact your Rudler, PSC advisor at 859-331-1717.

RUDLER, PSC CPAs and Business Advisors

This week's Rudler Review is presented by Joshua Myers, Staff Accountant and Audrey Goetz, CPA, CVA.

If you would like to discuss your particular situation, contact Josh or Audrey at 859-331-1717.

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