Salt Lake City CPA – Children Employed in Family Owned Business
One great tax planning tool just got clarified in the last couple of days. In final regulations issued by the Treasury Department on October 31, 2011 the exceptions from taxes under FICA and FUTA under sections 3121(b)(3) (concerning individuals who work for certain family members) and 3306(c)(5) (concerning persons employed by children and spouses and children under 21 employed by their parents) has again been extended to entities that are distregarded as separate from their owners for federal tax purposes.
Recent changes to Section 301.7701-2(c)(2)(iv) provide that, with respect to wages paid after December 31, 2008, a disregarded entity is treated as separate entity for purposes of employment taxes and is treated as a corporation for purposes of employment taxes and related reporting requirements. Therefore, the entity, rather than the owner, is considered to be the employer of any individual performing services for the entity.
So in layman’s terms, the ability to take advantage of employing children under the age of 18 and not paying FICA or FUTA taxes if the parent owns a disregarded entity (single member LLC) and pays the child through that entity has been restored. The same holds true for persons employed by children and spouses and children under 21 employed by their parents through a disregarded entity are not subject to FUTA taxes. Prior to this regulation the recently passed law had made this impossible since an entity regarded as a corporation for payroll tax purposes could not take advantage or these exclusions.
This is a great way to save some significant tax dollars. Please be aware that these exclusions are also available to partnerships owned exclusively by Mom and Dad. (Salt Lake City CPA – Children Employed in Family Owned Business)