Family Members and Payroll Taxes

There is much to be said for hiring your family members to work in your business. Not only may you find that they'll agree to work cheap (at least until you begin to rake in the big bucks!) and at all kinds of odd hours of the day and night, but you may also realize some savings in payroll tax dollars.

We start with the fact that there is no specific exception from income tax withholding for wages you pay to family members. So, if family members are common-law employees of your business, you'll generally have to withhold income taxes from the wages you pay them.

However, assuming you don't run your business through a corporation or partnership, you will be relieved from some FICA taxes and federal and state unemployment taxes in some situations.

If you operate your business through a corporation, the payroll tax breaks associated with hiring family members are not available. This is because your corporation, and not you, will be considered the employer.

For similar reasons, most of the tax breaks won't be available if you operate your business through a partnership. However, if you and your spouse are the only partners of the partnership, you do retain the tax breaks associated with hiring your children. This rule holds true for limited liability companies as well, since in the eyes of the IRS, an LLC is treated as a partnership.