According to Tom Copeland, “…the simple answer for a family child care provider is – only in a few unique situations.”
If you hire 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 an employee – and that means they pay taxes and you must withhold the right taxes, and may have to have worker’s compensation insurance.
That means withholding Social Security/Medicare taxes and withholding federal and state income taxes. On top of that – if your child or husband is over age 21 you must also pay federal unemployment tax. While you can deduct these taxes as a business expense, your child or spouse must report their earnings as income on their IRS Form 1040, just as they would working for any company.
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This means you must also keep specific records and file a series of tax forms. Recordkeeping cannot be sloppy because the IRS is already suspicious about these types of arrangements. The IRS requires you to file Form 941 quarterly or Form 944 annually, Form W-2 and Form W-3, but if you have any doubts, immediately speak with your tax preparer.
A warning: You will also have to check with your individual state workers’ compensation office to see if you have to carry workers’ compensation insurance when hiring family members. According to Tom Copeland, “…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!).”
What’s the answer?
If your children or your spouse are working for you, you are not required to pay them and there are no tax consequences. Per Tom Copeland, “…you can give them money or gifts for their work, but this would be done as a personal transaction.” They are helping you and you are helping them because you are family. They would have to declare any money or gifts as income. The downside – you cannot deduct anything you give them as business deductions. To know what kind of insurances you need – check with your state workers’ compensation office to see if you have to carry insurance even if you aren’t paying them as an employee. Second, call your personal tax preparer to make sure you are conforming with requirements.