The Tricky Business of Hiring Your Kids
Hiring children can be a tricky business, and many Americans are unsure how to handle the tax complications. There are a series of questions that need to be answered to determine whether or not payments to children are subject to income tax withholding, social security, Medicare and unemployment taxes.
Here are some things to consider when it comes to taxes if hiring a child:
- Is the employer a corporation? This includes corporations controlled by a family member.
- Is the employer a partnership that includes a partner that is not a family member?
- Is the employer an estate? This includes estates of deceased parents.
If the answer was “yes” to any of the preceding questions, the child is subject to income tax withholding, Social Security, Medicare and the unemployment taxes that accompany hiring anyone else to perform the same duties.
These basic questions cover some of the broad uncertainty about taxes. However, if the answer to the applicable question was “no,” like anything with taxes, it is a bit more complicated.
For a child under the age of 18 who works for a parent in the parent’s trade or business, the payments aren’t subject to Social Security, Medicare and unemployment taxes. If the child is under age 21, the payments are subject to Social Security and Medicare, but not unemployment taxes. All payments to a child are subject to income tax withholding.
If the child is under 21 and being paid for domestic work or chores in the parent’s private home, the payments aren’t subject to Social Security, Medicare or unemployment taxes. So, some family members can get excited knowing they can pay their child for doing chores without having these employment tax consequences.
Also, payments for children are generally subject to income tax withholding. The exceptions to this include payments for domestic work in the parent’s home, for work not related to a trade or business that pays less than $50 in a quarter or if the child isn’t regularly employed.
For further information regarding hiring family members, check out these IRS guidelines.
To lower the chances of an audit and prepare to defend a tax return in the event of an IRS audit, a small business should conduct their own informal audit.
Learn more about gig economy taxes and how the Tax Cuts and Jobs Act affects them, with the experts at H&R Block.