Susan and Raul are first time parents. They had incurred a massive expense on renovating their house for the baby and when Susan had to go back to work, they were in dire need of someone to take care of the baby. Susan’s mother was ready to help and the couple decided to take it. They decided it was only fair to pay her some money to compensate for her time – there was no one else they trusted more!
Steven was expanding his business and he needed help. His son needed extra cash for a Europe trip and volunteered his time for some extra pocket money. Steven hired him to help with Sales Promotions wondering what would be the taxman’s guideline on such an arrangement.
Deborah’s dad was diagnosed with a heart disease. After his bypass surgery, he needed someone who could stay with him and take care of him for a while. Deborah was single, in-between-jobs and she agreed to take care of him. Her dad paid her for her time.
For many Americans, hiring family members makes business sense. You get a trusted employee and the money stays in the family. However, many times they are clueless about the tax treatment of such an arrangement. Moreover, the latest tax reforms by The IRS have made it all the more complicated. If you too have been wondering about it for sometime, this article is for you.
1. Hiring nannies
The IRS treats nannies as household employees, as long as they come to your home to take care of the child. However, if a worker performs childcare services for you in his or her home, that worker is not your employee, but is self-employed.
For hiring the services of a nanny, you may need to withhold or pay Social Security, Medicare taxes, and federal employment tax or both, if you have paid cash wages of $2000 or more in 2017. However, if that nanny is your parent the IRS makes an exception, if it meets the following two conditions:
1. Your parent cares for the child, who either:
– Is less than 18 years old
– Has a physical or mental condition which requires the personal care of an adult for a minimum of 4 weeks continuously in a calendar quarter
2. Your marital status is one of the following:
– You’re divorced and haven’t remarried
– You are a widow or widower
– You are living with a spouse who is suffering from a disability and is unable to take care of the child for at least 4 continuous weeks in the calendar quarter in which the services were performed.
Also, if by any chance your employee’s cash wages reach $1,27,200 (maximum wages subject to social security tax in 2017) do not count any wage that you will pay to that employee during the rest of the year as social security wages.
You should also remember that the employer is exempt from paying FUTA (Federal Unemployment Tax) on wages paid to this employee. The employer may also be exempted from paying State Unemployment Insurance, depending on the rules in the state.
2. Employing children in your business
Employing children could be a great tax-saving strategy for the whole family. Your child can get extra cash and you can get extra help. The wages you pay to your children will count as tax-deductible business expense and it will bring down your income liability.
When an under-18 child works for his or her parent – a sole proprietor or a single-member LLC, or running a partnership firm with the spouse, they won’t have to Pay Social Security or Medicare taxes for the child employed.
You also don’t need to pay unemployment taxes on their behalf as long as they are under 21.
3. Employing your child as a caregiver
In all likelihood, your children will be above 18 and not a parent themselves to be available to care for you. Therefore, the parent must set that child on payroll and make quarterly payments to cover the taxes. You will have to provide the child with a W-2 at the end of the year.
For seniors with health care needs, these care costs may be deductible as medical expenses. You should get written prescriptions from medical practitioners to backup the medical requirement for these services. The excess costs would come in Schedule A, as medical expenses especially valuable to seniors with high balances in their retirement accounts. By making this entry you can make your retirement accounts tax free. But this is not as simple as it sounds. Seek the help of an advanced tax filing service and save your dollars from the taxman’s axe.
4. Employing your spouse
If you are employed by your spouse, your tax liability for your wages is limited to income tax withholding, social security, and Medicare taxes but it is exempt from FUTA taxes.
Employing family members is a wise move if you know the rules set by The IRS. Understanding these rules is not that simple but a robust tax filing service will make it simpler for you. Consult us, the best Indian CPA in Irving and Plano. Email us at [email protected] for a free 30-minute consultation and find out for yourself.