Tom Willett
It is often common for a taxpayer to provide money to a spouse and children for their personal use. If the money provided is the personal money of the taxpayer, there is no tax consequence. However, if this taxpayer owns a business, they may create a tax advantage by providing this money in the form of a wage for services provided to the business. As a result, the money is now an expense to the business and thus reduces the income tax and Social Security/Medicare taxes paid by the business owner.
The first requirement is the taxpayer must have a business. The next step is to complete all of the necessary payroll applications (see Fact Sheet on Payroll Setup and Reporting).
The work performed by the family member must be for the business. (Records should be kept of when and the amount of time spent, as well as the work performed).
The wages paid must be reasonable in relationship to the work performed. For example, a spouse performing secretarial work should be paid at a secretarial rate.
Actual payments must be made to the family member.
First, in terms of withholding taxes, if the business owner hires his or her children, and the children are under age 18, then there are no Social Security/Medicare taxes to withhold from the payroll check.
Likewise, if the amount of wages paid to a child are less than $3800 (for 1995), there is no Federal income tax withholding (since the child automatically has a $3800 tax exemption). NOTE: If the child is going to make an IRA contribution, the wage may be increased. For example, if the contribution will be the maximum of $2,000, then the wage amount can be increased to $5,800.
In Ohio, if the amount of wages paid to a child are less than $3,500 (for 1996), there is no State income tax withholding.
In addition, for most Ohio cities there is no city withholding taxes for wages paid to children under age eighteen.
Second, in terms of business taxes, if the business owner hires his or her children, and the children are under age eighteen, then there are no Social Security/Medicare taxes to match (for the business to pay).
Likewise, there are no FUTA (Federal Unemployment tax) to pay (up to age 21).
In Ohio, there are no OBES (Ohio Bureau of Employment Services) taxes to pay (up to age 18).
The only tax would be to the OBWC (Ohio Bureau of Workers' Compensation). The amount of this tax is a function of the work performed by the family member and the OBWC categories and rates assigned to the business by the agency when the application for coverage is filed.
First, in terms of withholding taxes, if the business owner hires his or her spouse, Social Security/Medicare taxes must be withheld from the payroll check.
Whether or not there is Federal income tax withholding is a function of the couple's income tax situation. The spouse completes a W-4 to determine the amount of the withholdings.
Likewise, whether or not there is State income tax withholding is a function of the couples income tax situation. The spouse would complete an IT-4 to determine the amount of the withholdings.
If the business is located in a city with an income tax, there would be city withholding taxes based on the rate of that city. If the business is located in a city with no income tax, but your spouse and you live in a city with an income tax, you may want to withhold taxes for that city which will be due when you file your annual personal tax return.
Second, in terms of business taxes, if the business owner hires his/her spouse, there are Social Security/Medicare taxes to match (for the business to pay).
However, there are no FUTA taxes to pay (Federal Unemployment).
In Ohio, there are no OBES taxes to pay (Ohio Bureau of Employment Services).
The only tax would be to the OBWC (Ohio Bureau of Worker's Compensation). The amount of this tax is a function of the work performed by the family member and the OBWC categories and rates assigned to the business by the agency when the application for coverage is filed.
If this new wage is the only source of earned income for one's spouse and the wage is at least $500.00, the couple is eligible for a joint filing credit on their Ohio tax return (a credit of 5% to 20% depending upon their income).
This may also make the couple eligible for claiming child care credit on their Federal tax return (see IRS Form 2441).
It also makes the spouse eligible for a larger IRA of up to $2,000, instead of a $250 spousal IRA.
The business owner may also provide his spouse with a tax free award for length of service or safety achievement. This award can be up to $400 per year, but must be tangible personal property, such as a television, golf clubs, etc., but not cash or a gift certificate.
The business owner can also provide a family health insurance policy for the spouse which would make this insurance 100% deductible as a business expense, rather than a 30% deduction to taxable income. NOTE: If the business has other employees, they must be given the same plan unless they can be legally excluded on the basis of government eligibility requirements.
Likewise, the business owner can also provide a medical reimbursement plan which could make these expenses 100% deductible as a business expense, rather than making them an itemized deduction for the amount in excess of 7.5% of adjusted gross income. NOTE: If the business has other employees, they must be given the same policy unless they can be legally excluded on the basis of government eligibility requirements.
Like the spouse, the children could receive an award.
Children in school could receive a wage for legitimate research work performed for the business, as well as other business rated work.
Talk with your tax adviser to be sure you are complying with all of the requirements of the law. Tax law is constantly changing and you need up-to-date information to stay within the requirements of the law.
All educational programs conducted by Ohio State University Extension are available to clientele on a nondiscriminatory basis without regard to race, color, creed, religion, sexual orientation, national origin, gender, age, disability or Vietnam-era veteran status.
Keith L. Smith, Associate Vice President for Ag. Adm. and Director, OSU Extension.
TDD No. 800-589-8292 (Ohio only) or 614-292-1868