New Venture Lab: Equipping Christian Entrepreneurs

Question

What are the tax advantages of using the sole proprietorship structure for a family business?

Answer

As with any tax situation, the laws change and your situation may change, so be sure to seek competent tax advice.

Currently, the following holds true for sole proprietorships and family entreprenuers:

A parent employing a child under the age of 18 in a sole proprietorship family business (or a family partnership with both parents) can pay a child up to $5,000 per year without having to pay any federal income taxes, social security taxes, workers compensation, medicare or unemployment taxes (FICA is currently at = 15.3%); and the parents can still claim the child as a dependent.  When the child is between 18 and 21, the child is still not subject to unemployment taxes or workers compensation taxes. 

If a child earns more than $3,200 per year, they must be a qualifying child in order to be a dependent.  Key strategy: pay your children a regular salary to establish the proper fact pattern.  Spouses are not subject to unemployment taxes, but they are subject to the other taxes. 

The key requirements: your child must actually perform work and the pay must be at a market rate and not excessive. 

Key recommendations: pay your child on a consistent basis, keep good records and issue them a W-2. 

Other benefits include the fact that you can depreciate your home office and your automobile. 

The labor laws are very friendly within a family: you can employ children at any age for as many hours as you want, except for certain dangerous jobs such as mining, coal mining, explosives, logging, saw milling, drilling, saws, excavation operations, etc.