For closely-held business owners, employing family members can be a great strategy to help reduce your overall tax liabilities. If the family member is a bona fide employee, the employer can deduct his or her salary plus any benefits paid, just as with any other employee.
If the closely-held business is a sole-proprietorship, this salary deduction can also reduce the owner’s self-employment tax liability.
Children employed by their parents are not subject to FICA taxes if they are under 18 years of age, per IRS Section 3121, and are not subject to FUTA taxes if under age 21, per IRS Section 3306.
In addition, income paid to an employer’s child would be taxed according to the child’s lower tax bracket, and would be at least partially offset by the standard deduction, which is $12,200 for single filers for 2019.
It should be noted that wages paid to a family member must be reasonable for the amount of work he or she performs as an employee.
Another potential tax reduction strategy is the fact that an employer can provide up to $5,250 in annual tax education assistance, either undergraduate or post-graduate, for each eligible employee. These costs are fully deductible.
Please click here to email me any questions you may have about employing family members.
Until next Wednesday – have a great week!