Are the Wages Paid to a Family Member Tax Deductible?

Amherst, NH Family-Owned Business Looks to Hire Teenaged Family Members

Family-owned businesses have many tax advantages when employing family members.  Money paid to family members reduces the net income of the business, thereby reducing the overall tax burden.  In addition, insurance costs and other benefits offered to the employed family members can also be deducted from the business’ profits as an expense.  When a parent is the sole proprietor and the business is not incorporated when children under the age of 18 are employed, neither the business nor the employed minor are required to pay FICA taxes.  Having a family member on payroll, whether a minor child or spouse, can significantly reduce the amount of taxes owed at the end of the year.

A business owner in Amherst was looking to bring on her teenaged children to work.  Wondering how this would affect her taxes, at the end of the year, she contacted the team at Merrimack Tax Associates with questions.

Employing Minor Children Can Offer the Biggest Tax Savings

Those employees that are under eighteen are not required to pay FICA taxes.  This money includes money toward Social Security and Medicare.  Employees are not taxed for this until they reach eighteen.  Those under twenty-one are not required to pay FUTA taxes, which go toward unemployment compensation.  This offers significant savings since as the employer you are not required to pay these taxes on wages paid to the minor. 

Employing minor children also offers the opportunity to fund a retirement savings account for your child, while reducing the business’ overall tax liability.  Minor children are often taxed at a lower rate, based on their income, allowing your family to keep more money in the family. 

Spouse and Parents Employed in Family Businesses Can Also Offer Savings

There are no tax benefits to paying your spouse wages.  However, other benefits such as health insurance, life insurance and other fringe benefits can save you money by reducing the business’ profit that is taxed and offering your spouse these benefits.  The same is true for employing your parents.  While there are not any immediate savings on taxation through the wages, offering these family employees other benefits can offer a tax advantage.

The Amherst business owner was pleased to hear about how employing her underaged children could offer plenty of tax savings for the coming year.