Tax Prep & Planning

Family Business Tax – What You Should Know

Is it a dream of yours to go into business with or work with a family member—a spouse, child, or otherwise?

Before you take on this venture, know there are unique tax circumstances when work and family coincide. When families go into business together, certain employment and tax treatments apply differently as they would a normal, non-familial relationship. For instance, the taxes you withhold and report differ from a traditional employee, depending on your familial relationship.

Here are a few rules related to family businesses and tax:

Spouses in Business Together

If, you are in an unincorporated business with your spouse (and share in the profits and losses)…

Then, you can be considered partners even if you don’t have a formal partnership agreement. You should report income on a partnership tax return, Form 1065, rather than on a Schedule C in the name of just one spouse. Your shares of partnership income and expenses will be “passed through” to each of you individually on a Schedule K-1.

If, you and your spouse eligible for qualified joint venture treatment…

Then, you and your spouse may elect to be a qualified joint venture instead of a partnership. “Only businesses owned and operated by spouses as co-owners and not in the name of a state law entity, such as a limited partnership or limited liability company, are eligible for the qualified joint venture election,” according to the IRS. Income should be reported on a Schedule C for each of you.

If, your business has employees and you and your spouse are sole proprietors…

Then, either spouse may report and pay the employment taxes.

One Spouse is Employed By Another

If, you employ your spouse…

Then, your spouse’s wages are subject to income tax withholding and Social Security and Medicare taxes but not to the Federal Unemployment Tax Act (FUTA).

Your Child Is Employed By You

The benefit of hiring a child into a family-owned business includes introducing them to the business world and teaching them about work and managing their finances. Remember: your child’s work must be legitimate, and the amount the enterprise pays them must be reasonable for the wages to be deductible.

If, your child (who is under 18) is employed by the family business and you are a sole proprietorship or a partnership in which each partner is a parent of the child…

Then, payments for the services of a child aren’t subject to Social Security and Medicare taxes. Also, if the child is under 21, wages are not subject to FUTA.

You Are Employed By A Child

If, you are employed by one of your children…

Then, your wages are subject to income tax withholding and Social Security and Medicare taxes but, again, not to FUTA.

Need Help With Family Business Taxes?

Navigating taxes for a family business can be tricky. Remember, you can always enlist a tax expert’s help. Get matched with a tax advisor who best meets your needs now.  

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