Family employees

One of the advantages of operating your own business is hiring family members. However, employment tax requirements for family employees may vary from those that apply to other employees. The following information may assist you with pointing out some differences to consider.

Children employed by parents

Payments for domestic work in the parent’s private home:

• Are not subject to income tax withholding unless the payments are for domestic work in the parent's home.
• Are not subject to social security and Medicare taxes until the child reaches age 21.
• Are not subject to Federal Unemployment Tax Act (FUTA) until the child reaches age 21.

Employed in the parent’s sole proprietorship or a partnership in which each partner is a parent of the child:

• Payments for the services of a child are subject to income tax withholding regardless of age.
• Payments for the services of a child under the age 18 are not subject to social security and Medicare taxes.    
• Payments for the services of a child under age 21 are not subject to  FUTA tax.  If the child is 21 years or older, then payments for the services of a child are subject to FUTA taxes. 

If the business is a corporation, a partnership (unless each partner is a parent of the child), or an estate (even if it is the estate of the deceased parent of the child):

• Payments for services of a child are subject to income tax withholding, social security taxes, Medicare taxes and FUTA taxes regardless of age.

Parents employed by their child

If the business is a child’s sole proprietorship:

• Payments for services of a parent are subject to income tax withholding, social security taxes and Medicare taxes.
• Payments for services of a parent are not subject to FUTA tax regardless of the type of services provided.

If the business is a corporation (even if controlled by the child), a partnership (even if the child is a partner), or an estate:

• The payments for the services of a parent are subject to income tax withholding, social security taxes, Medicare taxes and FUTA taxes.

If the parent is performing services for the child, but not for the child’s trade or business:

• Payments for services of a parent are not subject to social security and Medicare taxes, unless the services are for domestic services and each of the following apply:
  • You employ your parent,
  • You have a child or stepchild living in the home,
  • You are a widow or widower, divorced, 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 a calendar quarter and
  • The child or stepchild is either under age 18 or requires the personal care of an adult for at least 4 continuous weeks in a calendar quarter due to a mental or physical condition.
• Payments for services of a parent are not subject to FUTA tax regardless of the type of services provided.

One spouse working with the other spouse in business

One spouse working with the other spouse in a business could be doing so in several different ways each with different tax treatments.  See Married couples in business for additional information.

Additional information

For additional employment tax information, refer to Publication 15 (Circular E), Employer Tax Guide and Publication 51 (Circular A), Agricultural Employer's Tax Guide.