The Census Bureau reports about 90% of U.S. businesses are family-owned or controlled, according to uschamber.com. If you are running a family business, there are tax-related tips you should know.
Following are some recommendations to help you optimize your deductions and maximize your return.
- Taxes apply differently depending on your business entity. The IRS has different rules for family-run businesses depending on the type of entity your business operates as. Schedule C businesses—which include sole proprietorships, husband-wife partnerships or LLCs treated as sole proprietorships for tax purposes—have different rules than S or C corporations. Schedule C businesses can hire children younger than 18 with the child’s wages completely exempt from Social Security and Medicare taxes and Federal Unemployment Tax Act taxes; the exemption applies to the employee’s share and the employer’s share of FICA taxes. However, if your business is incorporated, your child’s wages will be subject to FICA and FUTA taxes.
- Taxes apply differently to different relatives. Spouses are subject to income tax withholding and Social Security and Medicare taxes but not FUTA taxes because the proprietor and his or her spouse are considered a single unit. Children who are younger than 18 and employed by their parents will not be subject to Social Security, Medicare or FUTA taxes if the parents’ business is a sole proprietorship or a partnership in which both parents are partners. Children between ages 18 to 20 are treated like spouses and only exempt from FUTA taxes. Once children turn 21, they are subject to the same withholding taxes as any other employee. If a parent is employed by his or her child, the parent is subject to income tax withholding and Social Security and Medicare taxes but not FUTA tax. Wages for other family members, such as grandchildren or nephews, are subject to FICA and FUTA taxes as with any other employee.
- Take advantage of deductions in the Tax Cuts and Jobs Act. Before the Tax Cuts and Jobs Act, a child employed at the family business only could take a standard deduction of up to $6,350. The act doubled this provision through 2025 so your child can shelter up to $12,400 of his or her annual wages. Additionally, a child who earns less than the standard deduction does not owe any federal income taxes. If your child is simply working a part-time job at your family business during the summer, it may be smart to ensure their wages fall under the $12,400 threshold.
Be sure to keep careful records of family members’ wages, deductions and taxes to protect your business and your family.
