Hiring Family Members

One of the advantages of operating your own business is hiring family members. However, the employment tax requirements for family employees may vary from those that apply to other employees. A spouse or other family member is considered an employee if there is an employer/employee type of relationship. This happens when one spouse substantially controls the business in terms of management decisions and the second spouse is under the direction and control of the first spouse. If such a relationship exists, then the second spouse is an employee subject to income tax and FICA (social security and Medicare) withholding. If you are trying to control costs then workers compensation and other costs associated with having an employee may be an area to keep an eye on in the beginning. However, if the second spouse has an equal say in the affairs of the business, provides substantially equal services to the business, and contributes capital to the business, then a partnership type of relationship exists. If spouses carry on a business together and share in the profits and losses, they may be partners in a partnership whether or not they have a formal partnership agreement.