Masonry Magazine December 1999 Page. 29
Family Business
Tax Savings
by Mark E. Battersby
As a matter of course, many masonry contractors are actually in business with their spouses whether they are aware of it or not. Any married couple in business may do so innocently, not aware that our laws and our tax rules may well hold them jointly liable for the income and debts of the masonry operation.
Even in those instances where the married couple is aware of their liability and may have formalized the relationship by incorporating the masonry business or forming a legal partnership, there are all of those potential pitfalls to be aware of. Much has been said and written about nepotism, especially in government and business. However, there is no written rule that would prevent any masonry contractor from hiring a spouse, children or other family members in the business. There may even be tax advantages associated with that nepotism.
With our complex and often confusing tax rules, there is no one "right" way to own the masonry operation. The choices range from sole proprietorships, to partnerships and even two choices of corporations, regular and the small business or 'S' corporation which is treated much in the same manner as a partnership for tax purposes.
The legal question of liability of a spouse involved or not involved in the other spouse's business is one best left to local legal experts. However, in the tax arena, the subject of spouses and family members must be considered.
Every masonry contractor has different priorities. One contractor may be concerned with estate taxes somewhere down the road and decide that an incorporated masonry business will reduce that eventual estate tax bite. Another contractor and his or her spouse will be concerned with acquiring the required number of Social Security "quarters" for a spouse employed in the masonry operation. Still another contractor may want to attempt to split the masonry operation's income among family members in order to reduce the total tax bite.
Mere ownership, or joint ownership of business property does not automatically qualify any spouse for self-employment tax purposes. Accordingly, if a contractor and spouse are personally operating a masonry business or other property that they hold as joint tenants, the net profits are, generally, all treated as one partner's net earnings from self-employment.
Most masonry contractors operating as sole proprietorships are familiar with the general rule that wages paid to your spouse for working in your masonry business are, today, subject to Social Security (FICA) taxes as well as income tax withholding. Wages that a masonry contractor pays to his or her child working in the business are subject to income tax withholding but exempt from FICA if the child is under the age of 18.
If proof is required that the hiring of a wife or husband is a smart move for income tax purposes, one quick look at the tax withholding rates should be enough to convince anyone. After all, the 1999 Social Security tax rate is 7.65 percent each for the employee and the employer (a total of 15.3 percent).
Ordinarily, any individual who owns a masonry business may create a "working family" by employing his or her spouse and paying the spouse a salary. Employing one's spouse can be an extremely attractive method for splitting the family's income in such a manner as to take full advantage of our tax system.
If handled properly, the employer gets a tax deduction for compensation paid while the spouse receives taxable cash income and, in some cases, other economic benefits such as insurance coverage, pension plans, etc. with no or low tax price to the masonry operation.
Obviously, the employer cannot take a legitimate tax deduction if the spouse does not actually perform services for the masonry operation, or if the services rendered bear no reasonable relationship to the compensation paid. If the compensation paid is to be deductible in full by the employer, it must be reasonable.