Family Businesses: Tax Rules

Annette Nellen, co-editor of the South-Western Federal Taxation Series

It is not unusual for business owners to either employ family members or co-own the company with their family. A sole proprietor accountant might hire her teenage boy to help with data entry and website maintenance. Spouses may co-own and manage a business. Family members may be employees or co-owners of the business. Tax rules can be different. If the owner’s minor child works for the parent, wages are exempt from Medicare and Social Security taxes. FUTA does not apply to wages paid to children under 21 years of age.
Spouses who co-own businesses have many options for entity type.
Partnership
S corporation
C corporation
Qualified joint venture
A qualified joint venture is essentially a sole proprietorship, but both spouses own it. To qualify as a qualified joint enterprise, you must make an election. Instead of filing a partnership tax, the couple files two identical Schedule Cs which split the business revenue between the spouses (see SS761(f) or the IRS website).
See also IRS Fact Sheet 2019-14 (Oct 2019), on Tax treatment for family members who work in the family business.
CLASS ASSIGNMENTS
Ask students to search the IRS website and RIACheckpoint for information about tax rules that apply to family members who are employees or co-owners. Ask them to look at the website for their state tax agency in order to find any information.
Ask students to explain why a qualified joint venture is better for both spouses than a sole proprietorship in one spouse’s names, even though both of them work in the business. Visit the IRS website for more information.
Ask students why Congress exempted employer-parents of paying payroll taxes on their children-employees below age 18.
Ask students about the tax and non-tax benefits of employing children in the family business.
What is the tax policy perspective? Is it the individual, the family or a self-elected group? Describe your decision and explain why you chose one of the alternatives.
Continue your discussion in item 5. Continue with your discussion in item 5. Include Business Law concepts in the answer.

SWFT Chapters

Chapters 9 & 20 of SWFT Individuals
Chapter 13: SWFT Corporations
SWFT Comprehensive: Chapters 17, 18, 19/20, 21, and 22
Chapters 11, 12, 13, 14, 15 and 18 of SWFT Essentials

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