The simple answer for a family child care providers is – only in a few unique situations.
If you pay your own child who is age 18 or older or if you pay your husband to do work for your business you must treat them as your employee.
This means withholding Social Security/Medicare taxes and withholding federal and state income taxes. If your child or husband is over age 21 you must also pay federal unemployment tax. Although you can deduct these taxes as a business expense, your child or spouse must report their earnings as income on their IRS Form 1040. Therefore, there is little tax advantage to paying them.
If you do hire your own child or spouse you must also keep specific records and file a series of tax forms. The IRS requires you to file Form 941 quarterly or Form 944 annually, Form W-2 and Form W-3. Here is my article (Hiring Family Members) that spells out the record keeping requirements.
The rules are quite different if hire your own child who is under age 18. See my previous article: “How to Hire Your Own Children Under Age 18.”
A warning: Check with you state workers’ compensation office to see if you must purchase workers’ compensation insurance when hiring family members. Most states will not require this. However, in some states (New York being one that I know of) you must purchase workers’ compensation insurance for anyone who is with you when caring for children. This includes volunteers and family members (even if you don’t pay them!).
Reasons to Hire
There are a few situations where you may want to consider hiring your own children or your spouse:
* You want your children to learn the value of work and understand how to manage their own money.
* You want your children or spouse to earn wages to increase their lifetime Social Security benefits. The more they earn the more they will receive from Social Security.
* Your family has at least $1,000 of medical expenses that are not covered by insurance (this includes medical insurance premiums your husband pays at work). If you are in this situation you can establish a medical reimbursement plan (a Section 105 plan) that allows you to deduct 100% of all your uninsured medical expenses as a business deduction. For more information see my articles (“When Hiring Your Husband Makes Sense“ and “How Can You Deduct Family Medical Expenses?”).
If your children or your spouse are working for you, you are not required to pay them! However, be sure to check with your state workers’ compensation office to see if you must purchase insurance when they are helping you care for children, even if you aren’t paying them as an employee.
Note: In my original article I said that providers could give their spouse or child gifts in exchange for their work. Because of the potential that the IRS or your state might look at this an employer/employee relationship, I removed this. You can give your child an allowance, but it shouldn’t be payment for them helping you in your business.
Tom Copeland – www.tomcopelandblog.com
Image credit: www.picturesof.net
For more information on hiring family members see chapter 8 in my book Family Child Care Tax Workbook and Organizer.