Family Employees

Child employed by parents.

Payments for the services of a child under age 18 who works for his or her parent in a trade or business aren’t subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each and every partner is a parent of the child. The wages are generally subject to federal income tax withholding. If these payments are for work other than in a trade or business, such as domestic work in the parent’s private home, they’re not subject to social security and Medicare taxes until the child reaches age 21. However, see Covered services of a child or spouse, later.

Once you are paying the young child a wage, that generally entails filing federal quarterly payroll tax returns and in many cases have quarterly state payroll tax returns including: withholding tax, unemployment compensation insurance, family leave insurance, workman’s compensation insurance and disability insurance. Opening a Roth IRA and contributing 100% of the wages up to the limit of $6,500 or more is generally beneficial. Keep in mind that the child may have to file annual income tax returns, and may have problems with obtaining maximum financial aid if applying for college education.

Payments for the services of a child under age 21 who works for his or her parent, whether or not in a trade or business, aren’t subject to FUTA tax. Payments for the services of a child of any age who works for his or her parent are generally subject to income tax withholding unless the payments are for domestic work in the parent’s home, or unless the payments are for work other than in a trade or business and are less than $50 in the quarter or the child isn’t regularly employed to do such work.

One spouse employed by another.

The wages for the services of an individual who works for his or her spouse in a trade or business operated as a sole proprietorship are subject to income tax withholding and social security and Medicare taxes, but not to FUTA tax. However, the payments for services of one spouse employed by another in other than a trade or business, such as domestic service in a private home, aren’t subject to social security, Medicare, and FUTA taxes.

Covered services of a child or spouse.

CAUTION: The wages for the services of a child or spouse are subject to income tax withholding as well as social security, Medicare, and FUTA taxes if he or she works for:

A corporation, even if it is controlled by the child’s parent or the individual’s spouse;
A partnership, even if the child’s parent is a partner, unless each and every partner is a parent of the child;
A partnership, even if the individual’s spouse is a partner; or
An estate, even if it is the estate of a deceased parent.

That is because in these situations, the child or spouse is considered to work for the corporation, partnership, or estate, not you (the individual).

Parent employed by son or daughter.

When the employer is a son or daughter employing his or her parent, the following rules apply.

Payments for the services of a parent in the son’s or daughter’s (the employer’s) trade or business are subject to income tax withholding and social security and Medicare taxes.
Payments for the services of a parent not in the son’s or daughter’s (the employer’s) trade or business are generally not subject to social security and Medicare taxes.

.Social security and Medicare taxes do apply to payments made to a parent for domestic services if all of the following apply..

The parent is employed by his or her son or daughter.
The son or daughter (the employer) has a child or stepchild (including an adopted child) living in the home.
The son or daughter (the employer) is a widow or widower, divorced and not remarried, or living with a spouse who, because of a mental or physical condition, can’t care for the child or stepchild for at least 4 continuous weeks in the calendar quarter in which the service is performed.
The child or stepchild is either under age 18 or, due to a mental or physical condition, requires the personal care of an adult for at least 4 continuous weeks in the calendar quarter in which the service is performed.

Payments made to a parent employed by his or her child aren’t subject to FUTA tax, regardless of the type of services provided.