Tax Tip 2022-151:Understanding taxes when a family member signs the paycheck

Internal Revenue Service (IRS) sent this bulletin at 10/03/2022 10:27 AM EDT

IRS Tax Tips

October 3, 2022

Issue Number: Tax Tip 2022-151

Understanding taxes when a family member signs the paycheck

Many people work for a family member, whether it’s a child helping out at their parent’s shop or spouses running a business together. When someone is employed by a family member, the tax implications depend on the relationship and the type of business. It’s important for taxpayers and employers to understand their tax situation.

Married people in business together

Generally a qualified joint venture whose only members are a married couple filing a joint return isn’t treated as a partnership for federal tax purposes.
Someone who works for their spouse is considered an employee if the first spouse makes the business’s management decisions and the second spouse is under the direction of the first spouse.
The wages for someone who works for their spouse are subject to income tax withholding and Social Security and Medicare taxes, but not to FUTA tax.

Children employed by their parents

If the business is a parent’s sole proprietorship or a partnership in which both partners are parents of the child:

Wages paid to a child of any age are subject to income tax withholding.
Wages paid to a child age 18+ are subject to social security and Medicare taxes.
Wages paid to a child age 21+ are subject to Federal Unemployment Tax Act

If the business is a corporation, estate, or a partnership in which one or no partners are parents 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, a partnership, 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 several other criteria apply.
Payments for services of a parent are not subject to FUTA tax regardless of the type of services provided.

More information:

Election for Married Couples Unincorporated Businesses
Publication 334, Tax Guide for Small Business
Publication 15, Circular E, Employer Tax Guide
Married Couples in Business

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Tax Tip 2022-151:Understanding taxes when a family member signs the paycheck

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Issue Number: Tax Tip 2022-151