Tax Treatment for Family Members Working in the Family Business
Steve PerryHiring family members in a business can offer benefits such as lower labor costs and trusted help, but it comes with specific tax implications that business owners must understand. One key area is when spouses co-own a business. If both spouses materially participate and file jointly, they can elect to be a **qualified joint venture** instead of a partnership, allowing them to avoid filing IRS Form 1065. Instead, each spouse files a separate Schedule C, and no EIN is required unless needed for employment taxes. However, the business cannot be a state-recognized entity like an LLC or limited partnership. If a spouse is treated as an employee, normal payroll taxes apply, except for **FUTA**, which does not apply to spouses. Similarly, when children under 18 work for a parent’s sole proprietorship or partnership where both partners are parents, they are exempt from **FICA and Medicare taxes**, and under 21, exempt from **FUTA**. These exemptions disappear if the business is a corporation or includes non-parent partners. This area of tax law is complex and nuanced. Mistakes can lead to penalties or missed opportunities. For personalized guidance, consult Steve Perry, EA at Books, Taxes & More, who can help you navigate these rules with confidence and clarity.