Family Members on Payroll - Digit Payroll
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Family Members on Payroll

Putting family members on payroll may seem like a good idea for many small businesses.  In fact, in some circumstances, family members cost the company less in payroll taxes than a non-family member.  Although, like many payroll tax rules, the regulations are tricky.

Child employed by parents.  A child under the age of 18 who works for his or her parents, and the business is either a sole proprietorship or partnership (both parents most be the only partners), is not subject to social security, Medicare and FUTA taxes.  In New Jersey the child, under a sole proprietorship only, is not subject to NJ state unemployment or disability taxes either.  The child is subject to federal income tax.  The exemption for FUTA tax only is up to age 21.  This rule does not apply to corporations even if the only owners are the child’s parents.

Caution:  Children are still governed by the NJ Dept of Labor Laws which restricts children’s employment ages (over 14) and types of employment.

One spouse employed by another.  An individual who works for his or her spouse, and the business is a sole proprietorship, the individual is subject to social security and Medicare tax but not FUTA tax.  In New Jersey the individual, under a sole proprietorship only, is not subject to NJ state unemployment or disability taxes either.  The individual is subject to federal income tax.  Again, this rule does not apply to corporations.

Parent employed by child.  A parent who works for his or her child, and the business is a sole proprietorship, the parent is subject to social security and Medicare tax but not FUTA tax.  In New Jersey, the parent is not subject to NJ state unemployment or disability taxes either. The parent is subject to federal income tax.  Again, this rule does not apply to corporations.