 Internal Revenue Service IRS tax news. Understanding taxes when a family member signs the paycheck. I could tell you what happens when you work for a family member. The IRS screws you both. Shocking, I know. Bet you didn't see that one coming. In any case, first an attempt at a joke. The administration got some blowback for claiming Hurricane Ian actually identifies as a typhoon. Take back! The administration pushed back against the blowback. Looks like we're experiencing some blowback from the way offensive. It's time to hit him where he lives. His house? Bingo! Which doesn't usually work too well. Blowback being wind, wind being difficult to push. This is working! That means we gotta move to step three. I'm gonna push you underwater with my jowls. Don't scream! But in any case, they stated, If Ian, as a typhoon, wants to open the door to the western hemisphere to take a piss, who are we to question it? Who are we? This fool don't know who's we in! Reporters responded, But Hurricane Ian's potentially endangering the lives of the other people in the western hemisphere room. And then the administration got very stern. This is the last time we will tolerate this misstorming. This will not stand! Hurricane, bring me the clock of Fender Rodriguez. The storm absolutely will not endanger anybody in the hurricane room, because it identifies as a typhoon. Are you sure this is safe? Sure, I got my seat belt on. It's like, wait a second, that doesn't even make sense. If that were the case, why would we let the typhoon into the hurricane room in the first place? But anyways, like hold on a second. I thought typhoons spun counter-clockwise when taking a piss. And that storm was clearly spinning clockwise, making it a hurricane, not a typhoon. The administration was outraged. How dare you look at a typhoon spinning parts while it's taking a piss. How dare you? How dare you? How dare you call me inhumane? Throw that pervert in jail! And it's like, but wait a second, it's only natural to find the source of the water drenching your head, isn't it? I'm just telling the truth. The administration responds, yeah, well truth hurts. The truth hurts, doesn't it, Hapsburg? Oh sure, maybe not as much as jumping on a bicycle with a seat missing, but it hurts. Or put more precisely, truth will get you hurt. I mean, crap man, look at that. So just don't do it. Tax tip 2022-151, October 3, 2022. Many people work for a family member, whether it's a child helping out at their parents' shop or spouse is running a business together. When someone is employed by a family member, there's a link to that here. The tax implications depend on the relationship and the type of business. It's important for taxpayers and employers to understand their tax situation. So obviously, many people do work for family members. There's many kind of family-run businesses and those kind of businesses can be great, although the dual relationship can cause some problems both on the personal side, as well as the business side, which includes the IRS tax side of things. So typically, for example, if you have two family members that are going to go into business together, say as partners or something like that, sometimes the thought is that because we know each other so well, we're not going to really outline the partnership agreement as much as we would if we were not family members. And that usually could be a mistake down the road because even if you know someone well, you want to be able to outline what you're doing from a business perspective and so that everybody knows what they're getting into up front or what the expectations of the other people involved are. Same kind of situation in any kind of business. You want to have more of a contractual kind of agreement. So if you're employing someone that's a family member, you don't want to just assume that things are going to go fine because they're a family member or not want to impose more formal kind of structure. Usually, you want to kind of outline for your own purposes, not just legal purposes, so that everybody involved knows what is expected. On the tax side of things, of course, the IRS is going to be suspected or suspicious of family member transactions because they're not what we might call like arms length market type of transactions. In other words, if we're hiring someone in the family, we can imagine situations where they could structure the pay differently and so on because of personal situations as opposed to if you were hiring someone that's not related to you in any ways, we would assume because you have countering interests. The employer wanting to be paid as much as possible and have as little hours as possible typically and the employer wanting to pay as least as possible. Therefore, the market will take care of some of the concepts with regards to what's the actual pay that's being given and what not. So, you can imagine situations where the IRS is suspicious that someone is being overpaid or underpaid and the IRS will be suspicious of that in part because they think you're going to try to do that to reduce taxes. That's the perspective you've got to think about where the IRS is going to be concerned from. Given that, married people and business together, generally a qualified joint venture, there's a link to that here whose only member or a married couple filing a joint return isn't treated as a partnership for federal tax purposes. So, oftentimes the easiest structure to set up as a business will be a sole proprietorship. But if you're married, then you might say, well, now you've got two people involved. This is kind of tricky because marriage is kind of defined differently from state to state. So, the states are the things that typically kind of define marriage as a community property state or not and so on. But from a general perspective, you would think a marriage means two separate people are now joined together and you would think that would take place on a financial perspective as well. So, if the two business, two people were running the business, you would think then they would have one taxable entity. But it gets a little confusing as well because you've also got the federal income tax side of things you've got to think about that's going to be reported possibly on the joint form 1040. And then you've got the social security side of things that you have to be thinking about making sure that the proper spouses are getting applied the proper social security because social security benefits when they're actually paid out. Remember, when you're paying social security in, it's going to be based on if you're a sole proprietorship or a partnership, it'll be based on your self-employment tax. And then based on what you paid in, that's going to affect your benefits coming back. That's applied to each individual social security number even when married. So that's something you want to take into consideration. Now, so you might have a joint, a qualified joint venture where you've got two people and normally if it's a partnership, you have to file a partnership return, which might be like a flow through entity into the individual returns, but it can be more complex and costly to do that. Then if you were able to just file one schedule C. So you want to look into that and check it out, but hopefully you're in a situation if you have two married individuals that you could possibly file a qualified joint venture, which would be the one schedule C and then try to, but keep in mind what the impact is going to be on the social security stuff as well and who's going to be applied the social security. Just in terms of when you're trying to grow your sole proprietor from one person to multiple people in general, you also kind of just want to think, do you want to have a partnership to pull people in where you're sharing equity interests, but you're also sharing decision-making processes in that sense? Or do you want to hire someone in which case you got to deal with employee payroll taxes and that kind of stuff? Or is it possible you can hire contractors and stuff? Those are kind of your decision-making processes. Okay, someone who works for their spouse is considered an employee of the first spouse, makes the business's management decisions and the second spouse is under the direction of the first spouse. So you could have a situation where you're saying, okay, it's one spouse's business, but the other spouse is basically working for the business. Now, in that case, then the one spouse might be paying the other spouse, of course, some form of payroll. And once again, you want to be thinking about what's going to be the implications in terms of the tax implications. And you could also think about the implications for like social security and the benefits and that kind of stuff as well. So the wages for someone who works for their spouse are subject to income tax withholding and social security and Medicare taxes, but not to FUTA tax, Federal Unemployment Tax Act. Okay, so children employed by their parents, if the business is a parent's sole proprietorship or a partnership in which both parents are parents of the child. So wages paid to a child of any age are subject to income tax withholding. So now you're paying the child, the child's receiving money, it's going to, it could be subject to income tax withholding, as it would be if you're paying some other employee. Wages paid to a child age 18 plus are subject to social security and Medicare taxes. So then after 18, they're an adult, they choose where they're going to be at that point in time as an adult. And you would think then being subject to the social security and Medicare, they got to pay into that stuff. Wages paid to a child age 21 plus are subject to the Federal Unemployment Tax Act. So the Unemployment Tax Act kicks in at that point. It's usually a fairly smaller tax, the Federal Unemployment Tax, but then that kicks in. So if the business is a corporation, a state or partnership in which one or no parents are parents of the child, payments for services of a child are subject to income tax withholding, social security taxes, Medicare taxes, and food taxes, regardless of age. Parents employed by their child. So now the child is employing the parent. If the business is a child's sole proprietorship, the payments for services of a parent are subject to income tax withholding, social security taxes and Medicare tax. That's what you'd kind of expect. Payments for services of a parent are not subject to food to tax, regardless of the type of services provided. Federal Unemployment Tax Act, again, that's usually a smaller tax, but not subject to that. So if the business is a corporation, a partnership or an estate. So remember, a small business oftentimes will be set up as a sole proprietorship possibly, or then it could be like a partnership. If it moves into a corporation, now you've got like a separate legal entity kind of situation in that case. So the payments for services of a parent are subject to income tax withholding, social security tax, Medicare taxes, and food taxes in that case. If the parents is performing services for the child, but not for the child's trade or business, payments for services of a parent are not subject to social security and Medicare tax unless the services are for domestic services and several other criteria apply. There's a link to that criteria here. Payments for services of a parent are not subject to food tax, regardless of the type of services provided. You got more information at the links below. You got the election for married couples unincorporated business. You got Publication 334, Tax Guide for Small Business, Publication 15, Circular E, Employer Tax Guide, Married Couples in Business. There's links to that stuff here. There'll be a link to this in the description.