Employment Tax Considerations When Hiring Parents or Children

07-10-2023Tax Information

Business owners need to consider things besides family dynamics when hiring their parents or children. One of those things is employment taxes.

Child works for parent - When a child works for a parent's sole proprietorship or a partnership in which each partner is the child's parent:

• Payments for the child's services are subject to income tax withholding. But, payments for the services of a child under age 18 are not subject to social security and Medicare taxes, while payments to a child over age 18 are.
• Payments for the services of a child under age 21 are not subject to Federal Unemployment Tax (FUTA). Payments to children over 20 are.

In all types of company structures (the parent's C or S corporation, Non-parental partnership or estate) the employer treats the child's wages like those of any other employee.

Parents working for child – When a parent works for their child's sole proprietorship:

• In this case, payments for the parent's services are subject to income, social security and Medicare tax, but are not subject to FUTA tax.

In all types of company structures, the child's entity treats the parent's wages like those of any other employee. 

Parent's performing non-business services - If you hire your parent for childcare, payments for services of a parent are not subject to social security and Medicare taxes, unless the payments are for domestic services and each of the following apply:

• The child hires their parent to take care of a child, stepchild or grandchild living in the child's home,
• The child can't care for the grandchild (or step-grandchild) for at least four continuous weeks due to a mental or physical condition, and
• The grandchild (or step-grandchild) is under age 18 or requires adult care for at least four continuous weeks due to a mental or physical condition. 

This means a child's payments to a parent for childcare that enables the child to work aren't subject to social security and Medicare taxes. 

Payments for a parent's personal services are not subject to FUTA.