Small Business Tax Deduction: Hiring Your Spouse

Business Owner in Litchfield, NH Strategizes to Maximize Her Tax Deductions

There are some tax advantages to hiring your spouse to do work for your family business. You will not have to pay FUTA (Federal Unemployment Tax), which is set at 6.0%. Family based businesses are also exempt from withholding FICA (Federal Insurance Contributions Act). In order to take advantage of this tax savings, your spouse needs to contribute to the business for a compensation, making them a legitimate employee. This allows you to convert higher-taxed income from your business profit into lower-taxed income, creating significant savings.

A small business owner in Litchfield was frustrated with how much of her business’ sales were going to taxes. Looking for ways to maximize her business tax deductions, she contacted the team at Merrimack Tax Associates.

Tax Rules Vary for Different Family Members, Including a Spouse, Child, or Parent

The IRS rules for tax deductions regarding hiring family members for your business vary depending on the business entity, as well as the relationship the employee has with the business owner. When hiring a spouse, the earnings paid to this employee are still subject to income tax (in relevant states), Social Security, and Medicare taxes. They are not subject to FUTA and FICA taxes.

For minor children, where the parent is a sole proprietor or partnership where each parent is an owner, this can offer an even bigger advantage. Children working for that family business that are under eighteen are not subject to Social Security and Medicare taxes. They are also not required to withhold FUTA taxes until the child reaches the age of 21. If this business is a corporation or a partnership where one partner is not the parent of the child, the wages are subject to Social Security, Medicare, and FUTA taxes.

If you are hiring your parent to work for your family business, the wages earned are subject to income tax (when applicable), Social Security and Medicare. However, they are not subject to FUTA taxes.

There are many advantages to hiring a spouse or child for a family-based business, including potentially significant tax savings. The business owner in Litchfield was pleased to hear that by bringing her husband on board as an employee she could reduce her taxes and the entire household would benefit as a result.