1. The wages paid to them should be reasonable for the services performed.

2. You need to keep accurate records.

3. You should pay these wages on a regular basis, such as weekly, bi-weekly, or monthly.

4. You must issue a W-2 Form to each employee before January 31, and file Form W-3 by February 28.

5. You must file the required Employers Federal Tax Returns.

6. You must have a Form W-4 (Employee's Withholding Allowance Certificate) and Form I-9 (Employment Eligibility Verification) on file for each employee.

Wages to Dependents

If your dependents are under the age of eighteen, you do not have to withhold or pay social security tax on wages paid to them. Any wages paid to dependents over eighteen are subject to social security taxes. Federal taxes do not need to be withheld from wages paid to children. When filling out Form W-4, they claim "exempt" from withholding.

Wages to Your Spouse

Wages paid to your spouse are subject to social security taxes. You may also need to withhold federal tax, depending on the number of exemptions claimed on Form W-4. Make sure you check to see if you have to withhold federal taxes on your employee's wages.

Agricultural Employers

If you are an agricultural employer and pay over $2,500 for agricultural labor during the tax year, all wages other than to dependent children under the age of eighteen are subject to FICA. If the $2,500 rule is not met, then wages are subject to FICA if they exceed $150 per individual.
If you are paying Wisconsin agricultural wages, you may have up to seven employees before paying Worker's Compensation Insurance. (When counting employees to reach the 6-employee threshold, direct lineal relatives are not counted.) All non-agricultural wages may be subject to Worker's Compensation Insurance if more than $500 of wages is paid in any calendar quarter. The minimum penalty for failure to carry Worker's Compensation Insurance is $750. It is recommended that if you have employees, check with your insurance agent to verify that you meet the Worker's Compensation exclusion requirements. For those required to carry a Worker's Compensation Insurance Policy, you will find it may still be worthwhile to hire family members.
Paying family members for work that they do on the farm or in a family business can provide excellent tax savings.

Reasons for hiring a family member include:

• Expenses incurred by your spouse or dependent while accompanying you on bona-fide business trips are not deductible unless they are employees.
• If you employ your spouse, you may be able to set up a medical reimbursement plan that allows you to deduct your hospital insurance and medical bills as business expenses, not as itemized deductions. (Section 105).
• Wages paid to dependent child may be subject to tax at a lower bracket than the level you would have paid personally. In addition, these wages are not subject to self-employment tax.

Commodity Wages

In some cases, farmers may wish to pay their spouse and children over the age of eighteen in commodity wages. Commodity wages are not subject to social security tax. Using commodity wages merely involves paying the employee for work performed, not in cash, but rather in farm products such as calves, hay, steers, etc. Paying commodity wages is fairly easy; however, you must follow certain procedures to maintain it as a legitimate commodity wage that is not subject to social security tax. The first issue is that the commodity must be transferred to the employee and must be in their possession for at least 48 hours. All proper payroll forms must be filed when issuing commodity wages including Form 943, W-2's and W-3.
When paying wages to your dependents, check to ensure that you have provided over half of their support before you claim them on your tax return.

Record Keeping

Paying wages to family members involves a little extra bookkeeping and a little extra work; however, the tax savings that it provides is well worth it. Many times the IRS may disallow an expense as a deduction not because you can't legally take the expense but rather you haven't kept the proper records and/or filed the correct reports. Please give us a call if you need any help in setting up a payroll program, filing required forms, issuing W-2s, etc.



*This is general tax information. Each business situation may be different. This information should not be relied upon as your source of authority. Please seek professional advice for all tax and payroll situations.