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The Family that Works Together Pays Taxes Together

Those who run their own business have the advantage of hiring anyone they please, including family members, but along with that benefit comes the responsibility of adhering to specific tax treatments and employment tax rules. 

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Those who run their own business have the advantage of hiring anyone they please, including family members, but along with that benefit comes the responsibility of adhering to specific tax treatments and employment tax rules. 

Those who run their own business have the advantage of hiring anyone they please, including family members, but along with that benefit comes the responsibility of adhering to specific tax treatments and employment tax rules.

In the case where both spouses are in business together and share in profits and losses, they are considered to be partners whether or not they have entered into a formal partnership agreement. As such, they must report income or loss from the business on IRS Form 1065.

Not to muddy the waters, but spouses in business together could choose not to treat their joint venture as a partnership by making a qualified joint venture election. This designation is defined as a trade or business where the only members are a married couple who file a joint return; both spouses materially participate in the business; and both spouses elect not to be treated as a partnership. In this scenario, spouses are considered sole proprietors for federal tax purposes and must file a separate Schedule C to report their share of profits and losses. They are not required to have an Employer Identification Number (EIN) unless their sole proprietorship files excise, employment, alcohol, tobacco or firearms returns.

Should the business have employees, either spouse as sole proprietor can report and pay employment taxes. In this case the spouse, as an employer, must have an EIN for their sole proprietorship.

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If one spouse is employed by the other spouse, wages paid for those services are subject to income tax withholding, Social Security and Medicare taxes, but are not subject to the Federal Unemployment Tax Act (FUTA).

Should a child under the age of 18 be employed by parents, his/her wages are not subject to Social Security and Medicare taxes if the business is a sole proprietorship or a partnership where each partner is a parent of the child. Payments to children under age 21 for services rendered are not subject to FUTA but be aware, wages are indeed subject to income tax withholding regardless of the child’s age.

One additional scenario – wages paid for services to a parent employed by his or her child are not subject to FUTA tax, regardless of the type of services provided. However, they are subject to income tax withholding, Social Security and Medicare taxes.

Keeping a business “all in the family” can be rewarding, but there is no “free pass” when it comes to certain tax rules.  For more information, visit www.irs.gov 

 

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law. 

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