Business Taxes: Employing Parents

As we’ve been discussing in our Bullseye Tax Relief Business Taxes Blog Series, depending on the types of employees your business employs, there are different taxes, paperwork and requirements with regards to the IRS. As we’ve discussed previously in our Business Taxes: 1099 Independent Contractors and Business Taxes: Hiring W-2 Employees blog posts, there are big differences regarding a company’s tax responsibilities between hiring W-2 employees and 1099 independent contractors. As you’ll learn in this post, and as we touched on in our previous one, Business Taxes: Employing Family, there are even different rules and requirements stipulated by the IRS when it comes to employing family. 

In our previous post, Business Taxes: Employing Family, we went into detail about the different scenarios presented by the IRS when it comes to parents employing a child. In this post, we’ll discuss the different IRS implications involved when a child employs a parent.

Employment Taxes & Employing Parents

As of February 26th, 2021, according to the IRS Page Family Help, “The wages for the services of a parent employed by his or her child in a trade or business are subject to income tax withholding and social security and Medicare taxes. Wages paid to a parent employed by his or her child are not subject to FUTA tax, regardless of the type of services provided. For additional employment tax information, refer to Publication 15, Circular E, Employer’s Tax Guide, and Publication 51, Circular A, Agricultural Employer’s Tax Guide.”

Like a typical W-2 employee, a parent employed by their child is still subject to income tax withholding and social security and Medicare taxes, however, unlike a typical employee, the wages of a parent employed by their child are not subject to Federal Unemployment Tax Act taxes.

The same page, Family Help, as of February 26th, 2021, goes on to say that “if your parent works for you in your business, the wages you pay to him or her are subject to income tax withholding and social security and Medicare taxes. Social security and Medicare taxes do not apply to wages paid to your parent for services not performed in your business, but they do apply to domestic services if all the following apply:

• You employ your parent;
• You have a child or stepchild living in the home;
• You are a widow or widower, divorced, or living with a spouse, who because of a mental or physical condition, can’t care for the child or stepchild for at least 4 continuous weeks in a calendar quarter; and
• The child or stepchild is either under age 18 or requires the personal care of an adult for at least 4 continuous weeks in a calendar quarter due to a mental or physical condition.”

As you can see, the stipulations for the above scenario are quite specific, and seem to apply in situations where a parent is hired by a child to provide “domestic services” like nannying for their child’s child or stepchild. If this situation applies to you, you may be liable for social security and Medicare taxes for these wages.

If you’d like to learn more, or your business is struggling with any types of employment taxes or IRS tax debt, call the team at Bullseye Tax Relief today! We offer a free consultation and transcript analysis for new clients!

Sources:

https://www.irs.gov/businesses/small-businesses-self-employed/family-help