If you are wondering if you can hire your family members to work in your small businss, you may be pleasantly surprised. It is possible, and can provide tax benefits for your business.
Some tax benefits are as follows:
1. You won't be required to pay employment taxes if your business is not a corporation.
2. Hiring them reduces your self employment income.
3. If your children are under 18 (and at least 7 the IRS approved age for employing your children), your children are exempt from social security and unemployment taxes through and unincorporated business ( up to the standard deduction amount).
Be aware that you must also follow the IRS rules for hiring them including that your family member earns less than the standard deduction ($5,950.00 for 2012). Once your family member earns more that the standard deduction, he/she will owe taxes on that income. Also, you get a tax deduction for the amount you pay your family member, which reduces you taxable income.
In order for the work to be reasonably determined as business related, your family member must be doing legitimate work (related to the business only). In addition, you should record all hours of work, detailing specifically what each hour of work was for each family member. That way, you will have an accurate audit trail in case the IRS questions anything.
Finally, keep in mind that your business cannot be a corporation, but can be a sole proprietorship, or LLC in order to be qualified to hire your child in which the services of the family member are not subject to income tax withholding amounts. If you are hiring your spouse, the same rules apply.
More information can be found at the IRS website here:http://www.irs.gov/businesses/small/article/0,,id=97748,00.html
Note: This article and the information provided here is for general information only. The author is not a CPA or Enrolled Agent. If you have further questions, contact your tax professional for information on your specific situation.