How Hiring Family Members Can Lower Your Taxes

For business owners, hiring family members as employees can lead to significant tax savings. And in many cases, those savings extend to the family members as well as the business owner. Sole proprietorships and corporations are both entitled to tax savings when they hire family members, but the amount of savings varies according to business type.

Sole Proprietorships:  Sole proprietors stand to save them most when they employ family members. They're entitled to special savings when they employ either a child or a spouse.

• Employing children:  Sole proprietors who employ their own children are exempt from paying Social Security tax and FICA on their wages until the children reach 18. They are also exempt from paying FUTA tax until the children turn 21. And, employers can deduct any wages paid to those children from their net income for tax purposes. The children are exempt from paying FICA as well.
• Employing spouses:  Employing a spouse offers some significant advantages, including savings on FICA tax. When a sole proprietor employs a spouse who also has another job outside the family business, the income from the other job counts toward the sole proprietor's FICA limit on a joint income tax return. So the sole proprietor may see his or her FICA tax burden reduced.

  Employing spouses can also open new health insurance options. This stems from the fact that the owners of sole proprietors are not permitted to have health insurance premiums automatically deducted from their wages, nor are they permitted to deduct health insurance premiums from their taxable income. However, this rule doesn't apply to the spouses of sole proprietors. So, as an employee of the sole proprietor, the spouse could sign up for the company's health insurance and include the sole proprietor on the policy.