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Family business tax considerations

May 2, 2023

Father-Son-Family-Business

Some of the world's largest companies are family owned. Yes, we're looking at you, Walmart.

But the real backbone of every community is its locally owned and operated businesses. Although they are much smaller, these owners face many of the same challenges as do corporate behemoths that are run by and employ family members.

Working with family can be even more fraught when it comes to taxes, since employment tax requirements for related employees may vary from those that apply to other employees.

Here's an overview of some common family business tax considerations.

Married couples as business partners: For better or worse can be an even bigger challenge when spouses go into business together. Suddenly, differing opinions can materially affect a bottom line or even threaten a business' success.

The Internal Revenue Service can't help with many of these conflicts, but it does have tax advice for married couples who decide to expand their personal vows to the business arena.

For federal tax purposes, a qualified joint venture whose only members are a married couple is not treated by the Internal Revenue Code as a partnership. This simplifies things as far as tax filing.

As a qualified joint venture, all the business' income, gain, loss, deduction, and credit claims are divided between spouses according to their respective interests in the venture. Then, each spouse considers their respective shares of these items as a sole proprietor, meaning they account for them on the appropriate form, such as Schedule C. The same allocation applies for calculating self-employment tax/

This election generally does not increase the total tax on the return. It also ensures that each spouse receives credit for Social Security and Medicare coverage purposes.

To be considered for tax purposes a qualified joint venture involving the conduct of a trade or business, the enterprise must meet all of the following conditions:

  • The only members of the joint venture are a married couple who file a joint tax return.
  • Both spouses materially participate in the trade or business.
  • Both spouses elect to have the provision apply.
  • The business is co-owned by both spouses.
  • The business is not held in the name of a state law entity, such as a partnership or limited liability company (LLC).

Hiring, instead of partnering with, a spouse: If, however, your spouse is your employee, not your partner, you must pay Social Security and Medicare taxes for him or her.

The wages for the spouse working for his or her marital partner also are subject to income tax withholding, but not to unemployment under the Federal Unemployment Tax Act (FUTA), which provides for unemployment benefits to workers who lose their jobs.

Employing your children: The tax code also makes accommodations for business owners who hire their children,

Where a business is a parent's sole proprietorship or a partnership in which each partner is a parent of the child, the child's earnings are subject to income tax withholding regardless of age.

However, payment for work done by a child younger than 18 is not subject to Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA). If the child is 18 years or older, then that youth's wages are subject to those FICA paycheck collections.

Wages paid to a child younger than 21 are not subject to FUTA tax. However, if the child is 21 years or older, then payments for that child's services are subject to unemployment taxes.

Hiring your parents: Parents always want to help their kiddos, even after the youngsters are grown and running their own businesses. Some of these adult entrepreneurs take advantage of the tendency, and their parents' acumen, and hire mom and/or dad.

The tax implications of hiring a parent again depend on the choice of business entity.

If the hiring adult child's business is a sole proprietorship, then a parent's wages for business services are subject to income tax withholding, as well as Social Security and Medicare taxes. The parents' income, however, is not subject to FUTA tax, regardless of the type of services provided.

Where the entity employing a parent is a corporation (even if it's controlled by the adult child) or a partnership (even if the child is a partner) or an estate, then the parent's wages are subject to income tax withholding, FICA taxes, as well as FUTA taxes.

If all these familial business and tax entanglements are too much of a hassle, then find a tax professional with experience in this area to help you maneuver the intricacies of your family business.

By following all the tax rules, and good business practices, your mom and pop or Jones & Daughters (or Sons) endeavor might one day rival the Walton family's success.

You also might find these items of interest:

 

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TAX-SAVVY WAYS 
TO WRAP UP 2026

It’s over! With October’s extended filing deadline behind us, it is now time to focus on year-end moves to reduce your 2026 tax bill. 

You’ll find ways to do just that on the Tax Tips page (see the More Tax Posts drop-down menu at the top of the blog), as well as the separate tax tip pages for each month, notably October through December. If you’re on the Tax Tips page, you’ll find a monthly list at the end of this column. If you’re on another blog page, you can head straight to the October tips; at the bottom of that tips page you’ll find links to all the other 11 months’ collections of tax advice.

Not to spoil what you’ll find in that tax advice, but it does cover such things as tax deductions for charitable donations, investment moves that could reduce tax due, and ways to max out your tax-favored retirement savings. 

Finally, as the year winds down, things get hectic. There are lots of other things to occupy our time, like the much more fun upcoming holidays. But don’t lose sight of taxes, since timing is key. To be of use, most tax moves must be made by the end of the tax year. That’s Thursday, Dec. 31, which also is the last business day of the year. 

So that you don’t miss that final tax year deadline, also keep an eye on the countdown clock below. It will keep you on top of just how much time is left to make important, tax-saving moves. (Note: I’m in the Central Time Zone, so adjust accordingly for where you live.)

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