Can I Hire Family at a Small Business & Pay Cash?

by Chris Hamilton

The Internal Revenue Service considers cash as taxable, regardless of whether a family employee earned the cash from tips or compensation for regular or infrequent work. Small businesses owners can hire their family members as independent contractors if they need only specific jobs completed, a method that allows business owners to avoid withholding on and reporting cash wages under $600 per family member per year.

While a small business owner may think no harm can come of hiring family members and paying them cash under the table, businesses that keep financial books leave a trail that government agencies can uncover during an audit. If the business owner does not take withholdings from the cash payments he makes to family members, both the IRS and state tax authorities can build a civil case against him using estimations and have the authority to place liens against a small business owner's property to recover the money

these government agencies never received.

If a small business owners hires an immediate family member or his spouse as an employee, he must withhold estimated income tax, Social Security and Medicare tax from his cash earnings but not federal unemployment tax (FUTA). When hiring extended family members, he must withhold all four types of the aforementioned taxes and remit these payments to the IRS and local taxing authorities on behalf of his family members.

Small business owners who hire their children do not have to meet withholding or reporting requirements if the child does not exceed 18 years of age, but they must meet these requirements for older children. Children under the age of 21 who work in the family business do not have FUTA withheld from their cash payments. Family business owners who pay their children less than $50 per financial quarter to help with their business do not have to bother with reporting and withholding, regardless of age.

Category: Small business

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