Hiring family members can be a great planning strategy for any small business.
It allows the family and the business to save money on taxes. And, it offers loved ones the opportunity to share in the success of the family business. There are several different scenarios to discuss while considering this valuable planning strategy.
Hiring Your Children (Under 18)
Hiring your children under 18 is often a valuable strategy for both tax and non-tax reasons. Wages paid are deductible to the business. Income earned by the child is not taxable if it falls below the standard deduction, which is $12,400 for 2020. In addition, hiring a minor child to work in a family business teaches responsibility, business skills and useful life lessons.
Additionally, minors are not responsible for paying their share of Social Security and Medicare taxes. LLCs or partnerships are not liable for the employer’s portion of Social Security and Medicare taxes when the employee is a minor child. In contrast, S-corporation or C-corporation employers are responsible for these taxes.
Another consideration when hiring your children under 18 is determining reasonable compensation. Their wages must match the job they are performing. For instance, it would be unreasonable to pay a minor $30 per hour to shred paper or make coffee.
Hiring Your Children (Over 18)
When hiring your children over 18, it is very similar to hiring any other employee or contractor. The employer pays them reasonable compensation. The wages are deductible. The business issues a W-2 or 1099. The children are responsible for filing a tax return and paying income taxes (if over $12,400). Both the child and the employer will pay their share of Social Security and Medicare taxes. However, any tax is typically at a lower tax rate due to lower tax brackets.
Hiring a Spouse
While hiring a spouse generally does not provide direct tax savings, there are a few ways that this may be beneficial. For example, hiring a spouse offers the ability to contribute to a retirement plan, such as a 401(k) or SEP. Typically, maximum contributions are based on W-2 wages. These contributions are generally deductible. However, Social Security and Medicare taxes are still due on this income.
Additionally, W-2 wages also determine allowable contributions to fund an HRA (Health Reimbursement Arrangement), which is another valuable tax savings tool.
Hiring Other Family Members
Hiring other family members outside of your spouse or children (such as grandchildren or other relatives) can be beneficial in other ways. The process is identical to hiring traditional employees or contractors, with a few points to consider.
If you are considering helping a family member in need, think about putting them on the payroll rather than giving a gift of cash. This allows you to deduct the amounts paid as a business expense, which you cannot do with a gift.
The benefits and tax implications of hiring your children, spouse, and other family members vary among situations. Call our office in Atlanta today to discuss a strategy that best suits your needs and the needs of your family and business! We can be reached at 678-235-5460.
Article by Austin Bell
Founded by Gary Massey, CPA, Massey and Company is a boutique CPA firm is located in Atlanta, Georgia serving the needs of small businesses and their owners.