Maximize Your Green Business Tax Savings
Category: Business
When you are a small business owner or self-employed, hiring family members to work for your business can seem appealing.
It can provide reliable staffing solutions, a sense of shared commitment, and the promise of a harmonious work environment — and who would you rather trust than your family?
The phrase “family business” carries community and multigenerational entrepreneurial legacy connotations. In fact, they are the world’s oldest and most common type of business, from multinational organizations to your nearest corner store, and the backbone of the United States economy.
However, employing family members also comes with its share of specific rules and tax implications that business owners must also consider.
This article will explore what hiring family members means for small business owners in 2023, what tax benefits may be available, and how to make sure you meet your tax obligations when employing family.
The short answer is: Yes, absolutely.
However, there are some important considerations to keep in mind. Many of the potential challenges are not tax-related but interpersonal.
For example, favoring family members in certain roles can foment resentment among other members of your team, and communication issues can quickly arise. Just like any other employee, it’s essential that family members possess the skills and qualifications necessary for the roles they will be taking on and that they be compensated fairly for their work based on their skills and the responsibilities they have. Transparency and professionalism are also critical to avoid conflict.
For our purposes in this blog post, however, we’ll focus more specifically on the legal and tax implications.
Remember that laws and regulations vary by country and jurisdiction, so it’s advisable to consult with legal and financial professionals who are familiar with your location.
Below are some general legal considerations:
Here are some general tax considerations:
Once again, the simple answer is: Yes, of course. However, once again, there are some things to keep in mind.
When your business compensates a family member, you must collect a W-4 form from them upon hiring and deduct federal income taxes according to the information they provide. You will also need to withhold FICA taxes and factor in their pay when calculating the FICA taxes owed by your business.
You should also be sure to account for family member compensation when determining unemployment taxes and worker’s compensation and treat overtime payment for family members like you would for other staff. (This rule applies to family members who are exempt and earn below the overtime threshold.)
If your business offers holiday or sick pay and grants paid vacations to employees, extend the same benefits to family members. Additionally, if a family member is eligible for other perks like your company’s health plan, they should be included in that employee group.
Essentially, all benefits given to regular employees should also be provided to family members employed within your company.
There are some significant potential tax advantages to hiring family members.
For example, when a parent who operates a sole proprietorship or an unincorporated business employs their child below 18, neither the child nor the business is subject to FICA (Federal Insurance Contributions) taxes.
Wages paid to your child aged 18 to 20 are subject to FICA taxes but not FUTA (Federal Unemployment) taxes. As for children over 21, your company must treat them as ordinary employees for payroll tax and tax withholding purposes.
Furthermore, payments to children as wages can lower the business’s net income, consequently decreasing the self-employment taxes the parent must pay.
Finally, the income earned by the child is often taxed at a lower rate than the parent’s income, and a child’s income can be offset partially or entirely by their standard deduction. If your child earns less than the standard deduction, their income will be tax-free and deductible for the business.
There may also be benefits to hiring your spouse or parent — for both, their wages are typically not subject to FUTA taxes.
All of that being said, if you are considering adding a family member to your business’s payroll, be aware that the IRS will closely scrutinize your business, and any errors you’ve made could lead to an audit.
Another critical point: Remember that employing your child in the family business is still child labor, and you must adhere to all relevant laws. No special leniency is granted to parents who involve their children in the family business.
As always, attempting to exploit tax benefits without accurate records can also raise issues…so keep track of everything!
Finally, ensure you are aware of all specific tax treatments and rules that may apply in your situation.
Here are some first steps:
It’s important to emphasize that treating family members as legitimate employees is critical to compliance. Properly documenting their work, responsibilities, and compensations will help you navigate any potential audit or inquiry from tax authorities.
Since tax regulations and reporting requirements can vary based on your location and specific circumstances, it’s an excellent idea to consult with tax professionals (like us!) who can provide tailored guidance and ensure you’re fulfilling all your legal obligations.
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Jeff Coyle, CPA, Partner of Rosenberg Chesnov, has been with the firm since 2015. He joined the firm after 20 years of business and accounting experience where he learned the value of accurate reporting, using financial information as a basis for good business decisions and the importance of accounting for management.
He is a diligent financial professional, able to manage the details and turn them into relevant business leading information. He has a strong financial background in construction, technology, consulting services and risk management. He also knows what it takes to create organizations having built teams, grown companies and designed processes for financial analysis and reporting.
His business experience includes:
Creating and preparing financial reporting, budgeting and forecasting.
Planning and preparation of GAAP and other basis financial statements.
Providing insight on financial results and providing advice based on those results.
Jeff also has a long history of helping individuals manage their taxes and plan their finances including:
Income tax planning and strategy.
Filing quarterly and annual taxes.
Audit support.
General financial and planning advice.
Prior to joining the firm in 2015, Jeff was in the private sector where he held senior financial and management positions including Controller and Chief Financial Officer. He has experience across industries, including construction, technology and professional services which gives him a deep understanding of business.
Jeff graduated from Montclair State University, he is a CPA and member of the American Institute of Certified Public Accountants, New York State Society of Certified Public Accountants and New Jersey State Society of Public Accountants.
Jody H. Chesnov, CPA, Managing Partner of Rosenberg Chesnov, has been with the firm since 2004. After a career of public accounting and general management, Jody knows the value of good financials. Clarity, decision making, and strategy all start with the facts – Jody has been revealing the facts and turning them into good business results for more than three decades.
He takes a pragmatic approach to accounting, finance and business. His work has supported many companies on their path to growth, including helping them find investors, manage scaling and overcome hurdles. His experience and passion for business reach beyond accounting and he helps businesses focus on what the numbers mean organizationally, operationally and financially.
He has a particular expertise in early-stage growth companies. His strengths lie in cutting through the noise to come up with useful, out of the box, solutions that support clients in building their businesses and realizing their larger visions.
Prior to joining the firm in 2004, Jody was in the private sector where he held senior financial and management positions including General Manager, Chief Financial Officer and Controller. He has experience across industries, which gives him a deep understanding of business.
Jody graduated with a BBA in Accounting from Baruch College, he is a CPA and member of the American Institute of Certified Public Accountants and New York State Society of Certified Public Accountants.
In addition to delivering above and beyond accounting results, Jody is a member of the NYSCPA’s Emerging Tech Entrepreneurial Committee (ETEC), Private Equity and Venture Capital Committee and Family Office Committee.
He is an angel investor through the Westchester Angels, and has served as an advisor for many startup companies and as a mentor through the Founders Institute.