As a business form, the sole proprietorship is the simplest to create, and the most common. Consisting of a single owner operating an unincorporated business, many family businesses begin as sole proprietorships. One of the advantages of being the sole owner is the ability to hire family members, particularly one's children, as employees; however, federal employment tax rules are different for children of the owner of a sole proprietorship than for other employees.
Social Security and Medicare Taxes (FICA)
A sole proprietor who employs her son or daughter in the business or trade she operates is not required to withhold Social Security and Medicare taxes on payments made to the child, as long as the child is under 18 years of age.
Federal Unemployment Tax Act (FUTA)
A parent who employs a son or daughter who is under 21 years of age in a business operated as a sole proprietorship is not liable for payment of FUTA taxes on payments made for the services of the child.
Income Tax Withholding
Regardless of the age of the child, the payments made to a son or daughter by a sole proprietor for services the child performs as an employee are subject to federal income tax withholding. The child is responsible for payment of federal, state and local income taxes on the money earned while working for a parent.
The federal tax laws provide tax advantages to the sole proprietor who hires his children to work in the business, but the children must be treated with the same formalities that would apply to other employees. Proper records must be maintained to prove the hourly rate paid, the number of hours worked, and the amount earned during each payroll period in the event of an audit by the IRS.
State and Federal Child Labor Laws
Federal and state child labor laws limit the number of hours a child may work on a daily and weekly basis, establish the youngest age at which a child may be employed, and prohibit a child from doing work that is considered hazardous or dangerous. Most child labor laws allow children to work at age 14 if they have a work permit issued by their local school district. Although it varies from state to state, the number of hours a child can work is typically less on school days than on other days, and typically increases as the child gets older.
Excemptions From Child Labor Laws
Federal child labor laws permit children under 14 years of age to work in family owned businesses, but prohibit them from working in manufacturing or hazardous jobs. States may impose rules for children employed in family owned businesses, including sole proprietorships, that are more restrictive than the federal rules. For example, some states do not follow the federal laws, and choose to impose the same restrictions on family owned businesses as they do on other businesses. Most states exempt children working on family farms from the minimum age requirements and the limitation on the number of hours that a child can work.
Minimum Wage Laws
Children who work for their parent in a sole proprietorship must be paid the minimum hourly wage as set by law. Federal minimum hourly wage and overtime laws apply to children employed by their parents, so sole proprietorships should maintain accurate records showing the children's work schedule and the amount paid to each child.