by Rebecca Berlin
Normally you have to withhold and pay payroll taxes for your employees. If you hire certain family members to work in your business, you won't have to pay some of these taxes.
Payroll taxes are the state and federal taxes that you, as an employer, are required to withhold and/or pay on behalf of your employees. These include state and federal income taxes, which you withhold from your employees' wages. Also included in payroll taxes are social security and Medicare taxes, called FICA taxes, and federal unemployment tax, called FUTA taxes. For more information on payroll taxes in general read the article "What are Payroll Taxes".
The tax breaks for employing family members are limited. For one thing your business must be a sole-proprietorship. This is a business that is owned by one person or by a husband and wife, and is not a corporation. If you do own a sole-proprietorship you may be able to save on some of these taxes by hiring family members.
FICA taxes do not need to be paid for your children under the age of 18 who are working for you in your business. Normally, you would have to pay an extra 7.45% over and above the amount you pay for wages in FICA taxes on behalf of your employees. So if your child is working for you, you will save however much that 7.45% would be. FUTA taxes do not need to be paid for your children under the age of 21, for your spouse, or for your parents who are working for you in your business.
This is a tax savings for both you and the family member. Not only do you save the amount of FICA and/or FUTA tax you would have to pay on behalf of an employee, you don't have to withhold your family member's portion of those taxes either. So your overall cost of employing them is less and their net pay is more. This might make working together more attractive for both of you.