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Taxation rules applicable to payments made to family members

One of the biggest advantages of running a closely held family business is the ability to seek professional help from family members. Separate taxation rules are applicable for family employees in a family owned business, and it is necessary to be aware of these rules if you are running a closely held family business in Texas.

Payments made to your child below 18 years of age for services rendered by him or her to the trade or business are not accounted for while computing Social Security taxes, Medicare taxes and taxes under the Federal Unemployment Tax Act (FUTA) if the trade or business is a sole proprietorship or a partnership run by the child's parents. Exemption from FUTA is applicable until the child reaches 21. However, such payments are still subject to income tax withholding.

Further, payments made for services of a child are accounted for while computing Social Security taxes, Medicare taxes and taxes under the FUTA, if that child works for a corporation, even if it is controlled by his or her parent or a partnership where there are partners who are not his or her parents.

If your spouse is employed at your business and is not a partner, salary paid to the spouse is subject to Social Security and Medicare taxes. Wages paid for individuals who work under their spouses are exempted from FUTA. However, such exemption is not available if an individual works for a corporation which is controlled by the individual's spouse or in a partnership where the spouse is be a partner.

If a parent works at a business run by a child, that parent's income is subject to income tax withholding, Social Security taxes and Medicare taxes, but are exempt for FUTA purposes. However, if your parent takes care of your minor child because you are a single parent, then the wages paid for such services are subject to both Social Security taxes and Medicare taxes.

Source: IRS.gov, "Family Help," Accessed on Dec. 12, 2014

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