We have recently come across some cases where sole traders have unknowingly been employing and paying their spouse/partner from their business. This is fine as long as you’re a registered company and have registered as an employer.
However as a sole trader if you want to employ your spouse/partner in your business, you need to get Inland Revenue’s approval.
Employing Family Members
IRD have given further guidelines in QB 19/01 on the requirements for claiming tax deductions for payments to family members for services.
You cannot split the income you earn between your family members for income tax purposes. To claim a tax deduction for payments to a family member for services, the family member must provide services to your business and the amount paid must not be excessive. You must not pay the family member more than what you would pay a non-family member for the same services. In addition, if the family member is your spouse or partner, you must have the Commissioner’s prior approval for a deduction unless you run your business through a company.
Definition of family members are:
- your spouse or partner
- your parents, children, sisters, brothers, grandchildren, and grandparents and the spouses and partners of those persons
- your spouse or partner’s parents, sisters, brothers, grandchildren, and grandparents
- yours and your spouse or partner’s adoptive parents, adopted siblings, children, and grandchildren
- the trustee of a trust that any of these people has or can benefit under
