Employing family members in your business offers numerous advantages, yet it’s crucial to understand the specific employment tax regulations that apply, which can differ from those for non-family employees. This guide focuses on the Federal Unemployment Tax Act (FUTA) implications when hiring relatives, ensuring compliance and clarity for business owners.
FUTA Tax Considerations for Hiring Children
When parents employ their children, FUTA tax obligations vary based on the nature of the business and the child’s age.
Parent’s Sole Proprietorship or Partnership
If you operate as a sole proprietorship or a partnership where each partner is a parent of the child, the following FUTA rules apply:
- Children Under 21: Payments for services performed by children under the age of 21 are exempt from FUTA tax. This exemption applies regardless of the type of work performed.
- Children 21 or Older: Once a child reaches the age of 21, payments for their services become subject to FUTA taxes, just like any other employee.
Corporation, Partnership (Non-Parent Partners), or Estate
If your business is structured as a corporation, a partnership where not every partner is a parent, or an estate, different rules apply:
- Regardless of Age: Payments for services provided by a child are subject to FUTA taxes, irrespective of the child’s age. The business structure dictates the tax obligations in these cases.
FUTA Tax Implications When Children Employ Parents
The FUTA tax landscape shifts when children employ their parents. Here’s how it breaks down:
Child’s Sole Proprietorship
In situations where a child operates a sole proprietorship and employs a parent:
- FUTA Tax Exemption: Payments for services rendered by a parent are not subject to FUTA tax. This exemption is consistent regardless of the services the parent provides.
Corporation, Partnership, or Estate
If the child’s business is a corporation (even if the child controls it), a partnership (even if the child is a partner), or an estate:
- FUTA Tax Applicability: Payments for a parent’s services are subject to FUTA taxes. Similar to employing children in corporations, the business structure takes precedence.
Parent Providing Domestic Services (Unrelated to Child’s Business)
In specific scenarios where a parent provides domestic services for their child, and these services are not part of the child’s trade or business, FUTA tax is generally not applicable.
- FUTA Tax Exemption: Payments are not subject to FUTA tax, irrespective of the services provided.
Spouses Working Together and FUTA
For spouses working together in a business, FUTA tax treatment can vary depending on the business arrangement. For detailed insights, refer to resources specifically addressing married couples in business.
Seeking Further Information
This overview provides a guide to FUTA tax within family employment. For comprehensive details, consult Publication 15 (Circular E), Employer Tax Guide and Publication 51 (Circular A), Agricultural Employer’s Tax Guide for in-depth information on employment taxes.
