When you’re a business owner, you’re responsible for paying a variety of taxes for each employee. Some of these funds—such as Social Security and Medicare—can be withheld from an employee’s paycheck up to a certain amount, but others—such as federal and state unemployment taxes—must be paid by the employer. Fortunately, if you have employed family members, you may not be responsible for these payments. To help you navigate these requirements, here are a few important points to know about tax planning for a family business.

How Should Spouses Report Income When They Share a Business?

If two spouses run a business as a partnership, they must file a Form 1065 to report income and losses together. However, if they are co-owners that have established a qualified joint venture election, they can report income individually on a Schedule C—just as a sole proprietor would.

Speak with a tax accountant to figure out which organization is best for your business and if you’re eligible for a qualified joint venture election.

What Should Be Withheld When One Spouse Employs Another?

If one spouse employs their partner, the employed spouse should still have federal income, Social Security, and Medicare withheld from their pay. However, the business owner doesn’t need to pay the employee’s Federal Unemployment Tax (FUTA).

What Should Be Withheld When a Parent Employs a Child?

Employed children under the age of 18 years aren’t subject to Social Security and Medicare withholdings. However, this option is only applicable to sole proprietorships or partnerships that are co-owned by the child’s parents.

Employed children under the age of 21 years aren’t subject to FUTA.

No matter what the age of the child, federal income taxes should always be withheld.

When Is It Appropriate to Withhold Taxes for an Employed Child?

Even if a parent owns a corporation, employed children are still subject to all standard employee payroll taxes—including federal income, Social Security, Medicare, and FUTA. This requirement also applies to children who work for a partnership, in which only one parent is a partner.

What Tax Planning Is Required for Parents Who Are Employed By Children?

When a child employs a parent, they are not required to pay FUTA. However, federal income, Medicare, and Social Security taxes should still be withheld from the employed parent’s salary.

Figuring out what to withhold for employed relatives is just one of many tax planning challenges that business owners face. Fortunately, you don’t have to navigate these matters alone. Serving commercial clients in Lincoln, NE, PMC Tax Services LLC will accurately determine your organization’s overall liability, as well as prepare returns so you can file on time and without error. To learn more about these tax preparation services, visit this firm online or call (402) 467-5529.