ASK MICKEY, CPA: Are there any tax advantages or disadvantages when hiring family members?
ANSWER: Good question! One of the advantages of someone running their own business is hiring family members. But when including family members in business operations, certain tax treatments and employment tax rules apply. Here are some things to know when working with a spouse, parent, or child. Both spouses carrying on the trade or business if spouses carry on a business together and share in the profits and losses, they may be partners whether they have a formal partnership agreement.
Qualified joint venture: Spouses may elect treatment as a qualified joint venture instead of a partnership. A qualified joint venture conducts a trade or business where:
1. The only members are a married couple who file a joint return,
2. Both spouses materially participate in the trade or business, and
3. Both spouses elect not to be treated as a partnership. Employment taxes: If the business has employees, either of the spouses as sole proprietors may report and pay the employment taxes. The spouse, as an employer, must have an EIN for their sole proprietorship one spouse employed by another. The wages for the services of an individual who works for their spouse are subject to income tax withholding and Social Security and Medicare taxes but not to the Federal Unemployment Tax Act (FUTA).
Child employed by parents: Payments for the services of a child under age 18 aren’t subject to Social Security and Medicare taxes, if the business is a sole proprietorship or a partnership in which each partner is a parent of the child. Payments to a child under age 21 aren’t subject to FUTA. Payments are subject to income tax withholding, regardless of the child’s age.
Parent employed by child: The wages for the services of a parent employed by their child are subject to income tax withholding and Social Security and Medicare taxes. They’re not subject to FUTA tax.
For more information email mickey@onealcpa.net
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