Having a family business typically means employing family members to work in the business. A family business relationship may consist of a married couple working as a partnership or a qualified joint venture. It may involve children working for parents or even a child employing a parent. However, including family members in business operations mandates the consideration of those specific tax treatments and employment tax rules that apply in these circumstances.
Spousal Businesses
Spouses who carry on a business together and share in profits and losses may be partners regardless of whether they have a formal partnership agreement. Spouses who are partners for tax purposes should report profit or loss from the business but should not report the income in the name of one spouse as a sole proprietor.
However, spouses may elect not to treat their business as a partnership by making a qualified joint venture election. This applies if the members of a trade or business are a married couple filing jointly, who materially participate in the trade or business and elect not to be treated as a partnership.
A qualified joint venture election has limited application in that only businesses owned and operated by spouses as co-owners and not as a limited partnership or limited liability company are eligible for this election.
For federal tax purposes, spouses electing qualified joint venture status are sole proprietors requiring each spouse to report their share of profit and loss. No Employer Identification Number (EIN) is necessary unless the sole proprietorship must file excise, employment, alcohol, tobacco or firearms returns.
The partnership’s EIN for the qualified joint venture may not be used later by one spouse and must remain with the spousal partnership. The spouses will use it for the partnership in any year where the business doesn’t meet qualified joint venture requirements.
Employment Taxes & Family Members
For family businesses with employees, either of the spouses as sole proprietors may report and pay any due employment taxes. As an employer, a spouse must have an EIN for a sole proprietorship. The wages for the services of an individual working for their spouse are subject to income tax withholding and Social Security and Medicare taxes but not to FUTA taxes (Federal Unemployment Tax Act).
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 the child’s parent. While payments to a child under age 21 aren’t subject to FUTA taxes, payments are subject to income tax withholding, regardless of the child’s age.
When children work for a corporation, even if it’s controlled by the child’s parent or a partnership, (even if the child’s parent is a partner, unless each partner is a parent of the child) payments for the child’s services are subject to income tax withholding as well as Social Security, Medicare, and FUTA taxes. The wages for the services of a parent employed by their child are subject to income tax withholding, Social Security, and Medicare taxes, but not FUTA taxes.
If you operate a home business and have questions about spousal businesses or employment taxes of family members, call The Gartzman Law Firm at (770) 939-7710.