Article Highlights:

Employing a Child
Child Payroll Taxes
FUTA Tax for a Child
Child IRA Contributions
Child Tax-Free Income
Spouses Working in the Same Business
Partnership
Spousal Joint Venture
Spouse Employee

Along with the holidays comes a lot of extra work for many family-run businesses, which may require putting the kids to work and having a spouse help out over the busy time. There are special tax rules when hiring your children and also for your spouse, depending on whether he or she is a business partner or an employee.
Employing Your Child – Tax reform provided a more taxpayer-friendly tax treatment for children with earned income. Generally, when a child under the age of 19 or a student under the age of 24 without any investment income is claimed as a dependent of the parents, the child can earn up to $12,950 in 2022 without incurring any tax liability. If they earn more, then the next $10,275 is taxed at 10%. A reasonable salary paid to a child reduces the business-owner parents’ self-employment income and tax by shifting income to the child.
Example: You are in the 22% tax bracket and own an unincorporated business. You hire your 17-year-old child (who has no investment income) and pay the child $14,000 for 2022. You reduce your income by $14,000, which saves you $3,080 in income tax (22% of $14,000), and your child has a taxable income of $1,050 ($14,000 less the $12,950 standard deduction), on which the tax is $105 (10% of $1,050). Thus, the net income tax saved by the family is $2,975 ($3,080 − $105).
If the business is unincorporated and the wages are paid to a child under age 18, the wages will not be subject to FICA – Social Security and hospital insurance (HI, aka Medicare) – taxes since for FICA tax purposes, employment doesn’t include services performed by a child under the age of 18 while employed by a parent. Thus, the child will not be required to pay the employee’s share of the FICA taxes, and the business won’t have to pay its half either. In addition, by paying the child and thus reducing the business’s net income, the parent’s self-employment tax payable on net self-employment income will also be reduced.
Example: Expanding on the previous example and assuming your business profits are $130,000, by paying your child $14,000, you will reduce not only your self-employment income for income tax purposes but also your self-employment tax (the HI portion) by $375 (2.9% of $14,000 times the SE factor of 92.35%). But if your net profits for the year were less than the maximum SE income ($147,000 for 2022) subject to Social Security tax, then the savings would include the 12.4% Social Security portion in addition to the 2.9% HI portion.
A similar but more liberal exemption applies for FUTA, which exempts the earnings paid to a child under age 21 while employed by his or her parent from federal unemployment tax. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting solely of his or her parents. However, the exemptions do not apply to businesses that are incorporated or a partnership that includes non-parent partners. Even so, there’s no extra cost to your business if you pay a child for work that you would pay someone else to do anyway.
Additional savings are possible if the child is paid more or worked part-time during the year or in the summer and deposits the extra earnings into a traditional IRA. For 2022, the child can make a tax-deductible contribution of up to $6,000 to his or her own IRA. The business may also be able to provide the child with retirement plan benefits, depending on the type of plan it uses, its terms, the child’s age, and the number of hours worked. By combining the standard deduction ($12,950) and the maximum deductible IRA contribution ($6,000) for 2022, a child could earn $18,950 in wages and pay no income tax.
Example: Referring back to the original example, making a $6,000 traditional IRA contribution will only save the child $600 in tax, so it might be appropriate to make a Roth IRA contribution instead, especially since the child has so many years before retirement and the future tax-free retirement benefits will far outweigh the current $600 savings. Contributions to Roth IRAs aren’t deductible, but distributions are generally tax-free.
A child can benefit from the standard deduction and earn $12,950 tax-free (except FICA withholding) when working for someone else and still take advantage of an IRA deduction if his or her income exceeds the standard deduction.
For 2023, the standard deduction of a single person will increase to $13,850.
Note that if the child has unearned income, such as interest, dividends, or capital gains, and is under the age of 19 or is a student under the age of 24, the child may be subject to the ‘kiddie tax’ rules, under which the tax on the unearned may be taxed at the parent’s tax rate. This situation is not covered in this article.
Husband and Wife Working in the Same Businesses – A spouse is considered an employee if there is an employer/employee type of relationship, i.e., the first spouse substantially controls the business in terms of management decisions and the second spouse is under the first spouse’s direction and control. If such a relationship exists, then the second spouse is an employee subject to income tax and FICA (Social Security and Medicare) withholding. However, if the second spouse has an equal say in the business’s affairs, provides substantially equal services to the business, and contributes capital to the business, then a partnership type of relationship exists and the business’s income should be reported as a partnership on IRS Form 1065 or as a qualified joint venture (see below).
While the income and expenses of a partnership activity are reported on Form 1065, the net income or loss of the business, as shown on Schedule K-1 from the 1065, will still end up on the partners’ individual 1040 return(s), to be combined with any other income the couple has for the year. Partnerships are sometimes referred to as flow-through entities.
A provision of the tax code generally permits a qualified joint venture whose only members are a husband and wife filing a joint return to not to be treated as a partnership for federal tax purposes. A qualified joint venture is a joint venture involving the conduct of a trade or business if:

(1) the only members of the joint venture are a husband and wife,
(2) both spouses materially participate in the trade or business, and
(3) both spouses elect to have the provision apply.

Under the provision, a qualified joint venture conducted by a husband and wife who file a joint return is not treated as a partnership for federal tax purposes. Instead, all income, gain, loss, deduction, and credit items are divided between the spouses in accordance with their respective interests in the venture. Each spouse takes into account his or her respective share of these items as a sole proprietor. Thus, it is anticipated that each spouse will account for his or her respective share on the appropriate form, such as Schedule C. When determining net earnings from self-employment for computing self-employment tax, each spouse’s share of income or loss from a qualified joint venture is taken into account, just as it is for federal income tax purposes under the provision (i.e., in accordance with their respective interests in the venture).
This generally does not increase the total tax on the return, but it does give each spouse credit for Social Security earnings, on which Social Security retirement benefits are based. However, this may not be true if either spouse exceeds the Social Security tax limitation.
If your spouse is your employee and not your partner, then you must make Social Security and Medicare tax payments to the government for him or her – half the amount comes from the employee via withholding from his or her wages, and half comes from the employer. The wages for the services of an individual who works for his or her spouse in a trade or business are subject to income tax withholding and Social Security and Medicare taxes but not to FUTA tax. In addition, state taxes may also have to be withheld and remitted to the state government. The employer-spouse must issue a Form W-2 for the employee-spouse.
If you have questions about the information provided here and other possible tax benefits or issues related to hiring your child or your spouse, please give this office a call.

Article Highlights:

Benefits Sunsetting After 2021
Benefits Sunsetting After 2022
Not Needing to File May Be an Opportunity
Maximize Education Tax Credits
Employer Health Flexible Spending Accounts
Maximize Health Savings Account Contributions
Roth IRA Conversions
Avoid Required Minimum Distribution (RMD) Penalties
Recognizing Capital Losses
Take Advantage of the Zero Capital Gains Tax Rate
Make Business Purchases
Prepay State Income and 2023 Property Taxes
Charitable Deductions
Qualified Charitable Distributions
Pay Outstanding Medical or Dental Bills
Remember the Annual Gift Tax Exemption
Avoid Underpayment Penalties
Disaster Loss Planning
Divorced or Separated During the Year

Year-end is rapidly approaching as are the holidays. So before you become distracted with the seasonal celebrations, it may be in your best interest to consider year-end tax moves that can benefit you for both 2022 and 2023.
Having the Congressional members preoccupied with the November mid-term elections has sidelined, at least temporarily, any legislation to extend tax provisions that expired after 2021 and won’t be available for 2022, including: the mortgage insurance premium deduction; increased AGI limit for charitable deductions for those itemizing deductions; the above-the-line charitable deduction for non-itemizers; tax credits for COVID sick and family leave pay for self-employed individuals; the employee retention credit (for employers); the temporary increase in the child tax credit, which reverts to $2,000, the old phase-out levels and the lower age to be a qualifying child; the child and dependent care credit that returns to pre-COVID amounts; and the enhanced earned income tax credit for taxpayers without a qualifying child.
Looking forward to 2023, the temporary allowance of a 100% deduction for business meals at a restaurant ends after 2022 and reverts to 50%; bonus depreciation on business property purchases begins to phase out and will only be 80% in 2023.
Here are last-minute tax issues you might consider:
Not Needing to File May Be an Opportunity – If your income and tax situation is such that you do not need to file for 2022, don’t overlook the opportunity to bring in some additional income, to the extent it will be tax-free. For instance, if you have appreciated stock that you can sell without incurring any tax, consider selling it, or perhaps take a tax-free IRA distribution if you are 59½ or older or if younger and qualify for an exception to the “early withdrawal” penalty.
Maximize Education Tax Credits – If you qualify for either the American Opportunity or Lifetime Learning education credits, check to see how much you will have paid in qualified tuition and related expenses in 2022. If it is not the maximum allowed for computing the credits, you can prepay 2023 tuition if it is for an academic period beginning in the first three months of 2023. That will allow you to increase the credit for 2022. This is especially effective for students just starting college who only have tuition expense for part of the year.
Employer Health Flexible Spending Accounts – If you contributed too little to cover expenses this year, you may wish to increase the amount you set aside for next year. As a reminder, feminine menstrual products and COVID personal protective equipment now qualify. The maximum contribution for 2022 is $2,850. The amount that may be carried to 2023 is $570 and must be used in the first 2½ months of 2023.
Maximize Health Savings Account Contributions – If you become eligible to make health savings account (HSA) contributions late this year, you can make a full year’s worth of deductible HSA contributions even if you were not eligible to make HSA contributions for the entire year. This opportunity applies even if you first become eligible in December. In brief, if you qualify for an HSA, contributions to the account are deductible (within IRS-prescribed limits), earnings on the account are tax-deferred, and distributions are tax-free if made for qualifying medical expenses.
Roth IRA Conversions – If your income is unusually low this year, you may wish to consider converting your traditional IRA into a Roth IRA. The lower income results in a lower tax rate, which provides you an opportunity to convert to a Roth IRA at a lower tax amount. Also, the decline in the stock market may provide an opportunity for some to convert where the stocks in their retirement account have had a significant decline in value.
Avoid Required Minimum Distribution (RMD) Penalties – Once U.S. taxpayers reach the age of 72, they are required to take what is known as a “required minimum distribution” from their qualified retirement plan or IRA every year. If this is the first year that this rule applies to you and you haven’t withdrawn the required amount yet, there’s no need to panic – you don’t have to do so until sometime during the first quarter of next year. Of course, if you wait until 2023 to take your 2022 distribution, you’re going to end up having to take two distributions in one year – one for 2022 and one for 2023.
For those who have fallen into this category before 2022, you only have until December 31st to take the required distribution if you want to avoid penalties.
Recognizing Capital Losses – With our current down market you should review your stock portfolio and consider selling losers to offset capital gains that would otherwise be subject to the 15% or 20% long-term capital gains tax rate. Capital losses can also offset up to$3,000 ($1,500 in the case of a married taxpayer filing a separate return) of ordinary income if capital losses exceed capital gains by at least that amount. Recognizing capital losses to offset capital gains can also reduce the amount of income subject to the net investment income surtax. Be aware of the wash sale rules that don’t allow you to deduct a loss if you repurchase those loser stocks within 30 days before or after the sale date.
Take Advantage of the Zero Capital Gains Rate – There is a zero long-term capital gains rate for those taxpayers whose taxable income is below the 15% capital gains tax threshold. This may allow you to sell some appreciated securities that you have owned for more than a year and pay no or very little tax on the gain. The 2022 15% capital gains tax bracket starts at taxable income of $83,351 for married joint filers, $55,801 for those filing as head of household, and $41,676 for all other filers.
Make Business Purchases -You can reduce taxable income if you make last-minute business purchases such as for office equipment, tools, machinery, and vehicles and write them off using the 100% bonus depreciation or Sec. 179 expensing, provided you place the item(s) into business service by the end of the year. However, you must consider the impact that expensing the items will have on your taxable income and the Sec. 199A 20% pass-through deduction. It may be appropriate to contact this office in advance of any last-minute business acquisition.
You might also make sure you are taking advantage of the de minimis safe harbor rule that allows small businesses to expense rather than capitalize the purchase of tangible property up to $2,500.
Prepay State Income and 2023 Property Taxes – You probably know that if you are not subject to the alternative minimum tax and you itemize your deductions, you are eligible to deduct both your property taxes and state income (or sales) tax up to a maximum of $10,000. But did you know that in some cases, you can increase the amount that you deduct on your 2022 return by prepaying some of the taxes by December 31, 2022? You can ask your employer to boost the amount of your state withholding by a reasonable amount; or, if you are self-employed, pay your 4th-quarter state estimated tax installment in December (due in January) and increase your deduction. The same is true for your real estate taxes: if you pay your first 2023 installment in 2022, you can take it as part of your 2022 deduction. But be mindful of the so-called SALT limit – the maximum deductible amount of state and local taxes of all types is $10,000. So, don’t electively prepay state taxes if you are at or above the $10,000 cap.
Charitable Deductions – Many people who itemize take advantage of the ability to take a deduction for their donations to their favorite charities or house of worship. Did you know that you can choose to pay all or part of your 2023 planned giving in 2022 in order to increase the amount you deduct in 2022? Though this may not be appealing to those who itemize every year, if you alternate between taking the standard deduction one year and itemizing the next, this can give you a big boost.
Charitable contributions are deductible in the year in which you make them. If you charge a donation to a credit card before the end of the year, it will count for 2022. This is true even if you don’t pay the credit card bill until 2023. In addition, a check will count for 2022 if you mail it in 2022. For last minute mailings it may be appropriate to obtain a proof of mailing from the USPS.
Qualified Charitable Distributions – Those who are age 70½ or older are allowed to transfer funds (up to $100,000 annually) from their IRA to qualified charities without the transferred funds being taxable, provided the transfer is made directly by the IRA trustee to a qualified charitable organization other than a private foundation or a donor-advised fund. If you are required to make an IRA distribution (i.e., you are age 72 or older), you may have the distribution sent directly to a qualified charity, and this amount will count toward your RMD for the year.
Although you won’t get a tax deduction for the transferred amount, this qualified charitable distribution (QCD) will be excluded from your income, with the result that you may get the additional benefit of cutting the amount of your Social Security benefits that are taxed. Also, since your adjusted gross income will be lower, tax credits and certain deductions that you claim with phase-outs or limitations based on AGI could also be favorably impacted.
If you plan to make a QCD, be sure to let your IRA trustee or custodian know well in advance of December 31 so that they have time to complete the transfer to the charity. If you have contributed to your traditional IRA since turning 70½, the amount of the QCD that isn’t taxable may be limited, so it is a good idea to check with this office to see how your tax would be impacted.
Pay Outstanding Medical or Dental Bills – Taxpayers who itemize their deductions are able to deduct qualified medical and dental expenses that exceed 7.5% of their adjusted gross income. If you have reached that threshold or are close, then it may make sense for you to pay off any of those types of bills that are still outstanding rather than paying them over time. If you are near or above the limit, it may also make sense to look at what your medical and dental expenses will likely be for the next year and move those that you can into 2022 to increase the deduction. These expenses could include dental work or eyeglasses. An additional important issue: if you are thinking of doing this by paying using a credit card and you’re not going to pay the balance immediately, make sure that you’re not paying more in interest than you’re saving with the increased tax deduction.
Remember the Annual Gift Tax Exemption -Though gifts to individuals are not tax deductible, each year, you are allowed to make gifts to individuals up to an annual maximum amount without incurring any gift tax or gift tax return filing requirement. For tax year 2022, you are able to give $16,000 (up from $15,000 in 2021) each to as many people as you want without having to pay a gift tax. If this is something that you want to do, make sure that you do so by the end of the year, as you are not able to carry the $16,000, or any unused part of it, over into 2023. Such gifts need not be in cash, and the recipient need not be a relative. If you are married, you and your spouse can each give the same person up to $16,000 (for a total of $32,000) and still avoid having to file a gift tax return or pay any gift tax.
Avoid Underpayment Penalties – If you think there’s a chance that the income taxes you’ve paid to date for 2022 are insufficient, it’s a good idea to increase your withholding in the time that’s left to make up for it. Underpaying taxes makes you vulnerable to an underpayment penalty that is assessed quarterly. The good news is that even if you have underpaid for any or all of the first three quarters of the year and will owe taxes when you file your 2022 return, you can make up for it by boosting your year-end withholding, since federal withholding is deemed paid ratably throughout the year. Plus, increased withholding and possible payment of estimated taxes can also reduce the fourth quarter underpayment penalty.
Disaster Loss Planning – 2022 has had some significant declared disasters including Hurricanes Fiona and Ian plus the wildfires in the West. Any losses incurred because of a federally declared disaster can be claimed on the current year’s tax return or, at the election of the taxpayer, on the prior year’s return (2021 for 2022 disasters), generally providing quicker access to a tax refund. However, care must be exercised to ensure a disaster loss is claimed on the return of the year that will provide the greater benefit. In addition, after insurance reimbursement is accounted for, the result may not be as expected and should be determined before making the decision of which year to claim a loss.
Divorced or Separated During the Year – A divorce or separation can have a significant impact on a couple’s tax filings. Filing joint or separate returns, who claims the children, the tax rules related to whether to take the standard deduction or itemize, how income and tax prepayments are allocated, and more are issues to be considered. Best to figure that all out in advance.
Every taxpayer’s situation is unique, and the suggestions offered here may not apply to you. The best way to ensure that you are putting yourself into a tax-advantaged position is to seek advice from an experienced, qualified tax professional. Please contact this office if you need assistance.