Owning a small business is the dream for many Americans. When it comes to tax time, the nuances can cause somewhat of a headache if you're unsure of the unique challenges and liabilities. This is true for all industries but a multi-generational company has special considerations.
Family Business Tax Challenges
It may seem like common sense but you must treat your children employed in your business comparably to the way you treat any other employee. For example:
- Maintain detailed employee records, accounting of hours worked, and amounts paid in correspondence to services rendered.
- Issue regular company paychecks, just as you do for other employees (weekly, bi-weekly, etc.).
- Document services provided by family members, and ensure that their work is legitimate, and is considered necessary and normal for the business.
- Do not include family household chores as business activities.
- If you do not treat your children the same way you treat other employee’s in similar positions, the IRS may determine that their wages were not necessary to the business, and may reject them as deductible business expenses.
Reducing Your Family Business Tax Liability
- Hire Family Members — The tax benefits associated with wages are great for family businesses. You do not have to pay unemployment tax on your parents or spouse who work for your company. And, you might not have to pay Social Security or income tax on your children who are on your staff. But, to qualify for the tax benefits, you must pay legal wages, obey child labor laws, and ensure that your family’s work is a benefit to the company.
- Hire Independent Contractors — Hiring independent contractors relieves you from paying Social Security, Medicare, and unemployment taxes. Confirm that the workers do qualify as independent contractors.
- Maximize Deductions — Keeping receipts and thorough records, and having a skilled accountant are essentials for maximizing tax savings. Ensure that your records are complete for start-up costs, insurance, office expenses, travel, write-offs, equipment, materials, supplies, furniture, education, conferences, professional memberships, and other expenses.
- Pay Your Bills by Year End — Paying before your fiscal or calendar year end date permits you to claim as much as possible in expenses for the year.
- Make Purchases by Year End — Instead of waiting to repair or replace worn-out items, incur those costs before year end to add them to your expenses.
- Give Donations by Year End — Make your donations to charities by year end, in order to be allowed by the IRS to claim the deductions for those on the current tax year. Note that the IRS requires receipts for contributions valued over $250.)
- Utilize the Welfare-to-Work Tax Credit — Hiring under this program can recoup $2,400 per hire.
- The Welfare-to-Work Tax Credit — Helping people transition from welfare into the workforce can reduce your federal tax payment by as much as $9,000 (over two years) for a qualified new employee. Search these for additional business tax tips.
- Other Deductions and Allowances — Look online and ask your accountant for additional tips on tax savings and for a list of common mistakes businesses make that unnecessarily increase amounts paid for federal taxes.
Clearly defining roles and developing strong company leadership is a great start to getting the above processes in order to make tax time a breeze. It’s not the easiest endeavor, but it is possible for families who are up to the long-term challenges if you implement these best practices.
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