One of the advantages of operating your own business is hiring family members, not only to transfer income but also for the deductibility of this expense. Wages paid to family members (as well as non-family members) are deductible, as a business expense, including wages paid to your spouse.

Of course there are certain rules that must be followed including withholding income taxes and providing W2s to the SSA and to the employee. Yes, your children who you pay wages to are subject to federal income tax withholding, at any age as long as you plan on claiming them as dependents and their total income will be more than $850. In addition you must have an Employer Identification Number, if you are planning on paying wages, whether to family members or others.

Child employed by parents:

Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child. Payments for the services of a child under age 21 who works for his or her parent in a trade or business are not subject to Federal Unemployment Tax Act (FUTA) tax. Payment for the services of a child are subject to income tax withholding, regardless of age.

Covered services of a child:

The wages for the services of a child are subject to income tax withholding as well as social security, Medicare, and FUTA taxes if he or she works for:

• A corporation, even if it is controlled by the child's parent,
• A partnership, even if the child's parent is a partner, unless each partner is a parent of the child, or
• An estate, even if it is the estate of a deceased parent.

One spouse employed by another:

The wages for the services of an individual who works for his or her spouse in a trade or business are subject to income tax withholding and social security and Medicare taxes, but not to FUTA tax.

Covered services of a spouse:

The wages for the services of a spouse are subject to income tax withholding as well as social security, Medicare, and FUTA taxes if he or she works for:

• A corporation, even if it is controlled by the individual's spouse, or
• A partnership, even if the individual's spouse is a partner.