Masonry Magazine December 1999 Page. 30
To be considered as "reasonable" under our tax rules, the compensation paid to the spouse must be in accord with the prevailing rate of compensation for comparable positions with comparable employers in the local area. In the event that the compensation paid is determined by the IRS to be excessive, the employer's deduction will be lost to the extent that the amounts paid exceed reasonable compensation.
Another tax consequence of "spreading" the masonry operation's income between a husband and wife is to reduce the self-employment tax the owner must pay on his or her own self-employment income. Such income-dividing is subject to the reasonable compensation rules but, assuming the operation's burden of proof can be met, the reduction of combined family employment tax liability is, once again, substantial.
Remember, however, the employee spouse who is not covered under the Social Security Act will not be earning credits for the normal Social Security benefits as do other compensated employees. In addition, the self-employed spouse with reduced earnings will be compiling proportionately fewer Social Security retirement benefits for him or herself unless they are earning enough to pay the maximum in Social Security taxes for the year ($72,600 maximum earnings base for 1999).
Partners
Where the spouse is a partner in a masonry partnership, the partnership entity is not legally required to withhold income tax from any distributions made to that partner. However, that partner may be subject to self-employment tax on any distributions.
Of course, under our tax rules, a partnership does not actually exist where a spouse who assists in the masonry business does not participate in, or have a right to participate in, the management of the business even where profits from the masonry operation are treated as family funds.
As a rule, a person working as an employee for a partnership in which his or her spouse is a partner is considered to be an employee of the partnership, not of the spouse. Thus, Social Security taxes must generally be paid on the employee's wages.
However, an exception exists where each member of the partnership is related to the spouse-employee in a manner that would ordinarily allow that partner to avoid withholding on the employee's wages if the partner were self-employed. In other words, a person employed by a masonry partnership that consisted solely of his or her spouse and children (e.g., a mother-daughter partnership that employed the husband/father) is not required to have income tax withheld from his or her wages.
Even though there is no income tax advantage in forming a husband/wife partnership in order to shift income from one spouse to another, such a partnership may be desirable for another reason. A husband/wife partnership entitles the "non-working" spouse to Social Security retirement benefits due to the self-employment tax on partnership income. The IRS has agreed that such partnerships are valid for this purpose.
Although shareholders of a so-called "S" corporation are treated much in the same manner as partners, they are not subject to the self-Continued on page 33
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