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All in the Family – Rules that Govern Family Businesses

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If you operate your business as a family enterprise, you already know the benefits of working with people you know. But you might not be aware of the associated tax benefits and potential pitfalls. Knowing the labor law and tax implications of working with family members can ensure that you enjoy the benefits of a family business – without nasty surprises from Uncle Sam.

Tax Breaks for Employing Children

Children’s wages are still potentially subject to federal and state income tax. Nonetheless, there are still tax breaks associated with employing your children in your company if your company is operated as a sole proprietorship or partnership owned entirely by you and your spouse. Specifically, you don’t have to pay Federal Unemployment Tax Act (FUTA) taxes for wages paid to your children under the age of 21. You also don’t have to pay Federal Income Contributions Act (FICA) taxes (Social Security and Medicare) taxes on wages to your children under the age of 18.

Likewise, if your child has no unearned income (e.g. dividends or interest payments) and his or her total wages fall under the limit for the standard deduction, you may be exempt from withholding federal income taxes from your child’s wages. Even if your child’s wages are subject to withholding, that income may be eligible to be subtracted from the income you report on your federal income tax returns, thereby potentially lowering your overall tax burden.

Child Labor Laws

Under federal labor laws, children of any age are allowed to work with few restrictions for companies that are operated as sole proprietorships or are totally owned by both parents. Nonetheless, federal (and state) child labor laws may still impact whether and how you may employ your children in your business.

For instance, Having your 17 year old son or daughter deliver a small replacement part to a customer on a single Saturday afternoon will probably not get you in hot water with the federal Department of Labor. Hiring that same child as a delivery driver with a regular route probably will. Likewise, requiring a child under age 17 to work more than 3 hours on a school day or 8 hours on a non-school day may well run you and your company afoul of the law.

Tax Breaks for Employing Spouses or Parents

If your spouse is employed by your company, you must withhold federal income taxes and FICA taxes from his or her wages. He or she must also receive the same benefits (including paid vacation and health insurance benefits) as other employees.

However, if you operate your company as a sole proprietorship, you are not required to withhold FUTA taxes from his or her wages. The same exemption applies to wages paid to a parent employed by your sole proprietorship.

If your spouse is enrolled in college or graduate school, you may be able to deduct payments or reimbursements made toward his or her employment related education. If your spouse travels with you on business, you may be able to deduct his or her travel expenses as a business-related expense. If you or your company pays your spouse’s health insurance premiums as well as his or her retirement benefits – they may be eligible for federal tax breaks as well.

SHOP Tax Credits

Under certain circumstances, your company may qualify for substantial federal tax breaks under the Small Business Health Options (SHOP) program. Your company must employ 25 or fewer full-time equivalent (FTE) employees with an average employee salary of $50,000 or less. (Higher benefits apply to companies with 10 or fewer FTE employees with an average employee salary of $25,000 or less.) Your company must also pay at least 50% of the health insurance premiums for its full-time equivalent employees.

State Laws May Vary

Your state may have stricter laws than the federal regulations regarding employing family members. This may be especially true regarding child labor laws. If there is a conflict between state law and federal law, the stricter regulation applies.

Disclaimer: This article describes general circumstances concerning regulations pertaining to employing family members. It is not intended to represent legal or financial advice. Please consult with a financial professional or attorney in your jurisdiction with specific questions about employing family members in your company.

Audrey Henderson

Posted In: Management, Money

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