Tax Guidance Regarding Family Members Working for Each Other Provided by IRS

NSTPInternal Revenue Service (IRS)

Tax Guidance Regarding Family Members Working for Each Other

Tax Guidance Regarding Family Members Working for Each Other Provided by IRS

IRS Fact Sheet FS 2019-14, Tax treatment for family members working in the family business

In a Fact Sheet and in its latest e-News for Small Business newsletter, IRS has set out tax guidance regarding family members working for each other.

Both spouses carrying on the trade or business. If spouses carry on a business together and share in the profits and losses, they may be partners even if they do not have a formal partnership agreement. In that case, they should report income or loss from the business on Form 1065. They should not report the income on a Schedule C (Form 1040) in the name of one spouse as a sole proprietor. However, the spouses can elect to treat the business as joint venture instead of as a partnership by making a qualified joint venture election.

Qualified joint venture. Spouses may elect treatment as a qualified joint venture instead of a partnership. A qualified joint venture conducts a trade or business where:

  • The only members are a married couple who file a joint return;
  • Both spouses materially participate in the trade or business; and
  • Both spouses elect not to be treated as a partnership.

Only businesses owned and operated by spouses as co-owners and not in the name of a state law entity, such as a limited partnership or limited liability company, are eligible for the qualified joint venture election.

Spouses electing qualified joint venture status are sole proprietors for federal tax purposes. Each spouse must file a separate Schedule C to report their share of profits and losses. They do not need an EIN unless their sole proprietorship must file excise, employment, alcohol, tobacco or firearms returns. One spouse cannot continue to use the partnership's Employer Identification Number (EIN) for the qualified joint venture. The EIN must stay with the partnership; a final Form 1065 should be filed to remove the requirement for annual partnership tax filings.

Employment taxes. If the business has employees, either of the spouses as sole proprietors may report and pay the employment taxes. The spouse, as an employer, must have an EIN for their sole proprietorship. If the business filed or paid employment taxes for part of the year under the partnership's EIN, the spouse may be considered the employee's "successor employer" for purposes of figuring whether wages reached the Social Security and federal unemployment wage base limits.

One spouse employed by another. The wages for the services of an individual who works for their spouse are subject to income tax withholding and Social Security and Medicare taxes but not to the Federal Unemployment Tax Act (FUTA).

Child employed by parents. Payments for the services of a child under age 18 are not subject to Social Security and Medicare taxes, if the business is a sole proprietorship or a partnership in which each partner is a parent of the child. Payments to a child under age 21 are not subject to FUTA. Payments are subject to income tax withholding, regardless of the child's age.

Payments for the services of a child are subject to income tax withholding as well as Social Security, Medicare and FUTA taxes if he works for:

  1. A corporation, even if it is controlled by the child's parent; or
  2. A partnership, even if the child's parent is a partner, unless each partner is a parent of the child.

Parent employed by child. The wages for the services of a parent employed by their child are subject to income tax withholding and Social Security and Medicare taxes. They are not subject to FUTA tax.