Family Business Tax-Saving Moves in the COVID-19 Era

Many family businesses have been adversely affected by the novel coronavirus (COVID-19) pandemic. But there’s a silver lining: Proactive tax planning can help your family business take advantage of potential opportunities in the COVID-19 era. Here are some tax-smart ideas to consider.

Hire Your Kids

This tax-saving strategy is most beneficial when your family business operates as:

A sole proprietorship,
A single-member limited liability company (LLC) that’s treated as a sole proprietorship for tax purposes,
A partnership that’s owned by a married couple, or
An LLC that’s treated as a married couple’s partnership for tax purposes.

Owners of these types of noncorporate family businesses can hire their under-age-18 children — as legitimate employees — and the children’s wages will be exempt from Social Security, Medicare and FUTA taxes. In fact, the FUTA tax exemption lasts until your employee-child reaches age 21.

Hiring your child — instead of an unrelated person — also keeps more money in the family. Right now, that’s a big advantage. It could be part of an overall life-saving strategy for your business.

You can hire your child part-time or full-time. Currently, your under-age-18 child may not be attending school — either due to the pandemic or summer break. And the 2020-2021 school year could be delayed or conducted remotely. So, in the COVID-19 era, your child’s availability to work in the family business may be greater than during normal conditions.

Thanks to the Tax Cuts and Jobs Act (TCJA), your employee-child can use his or her standard deduction to shelter up to $12,400 of 2020 wages paid by your business from federal income tax. Back in 2017, prior to the TCJA, the standard deduction was only $6,350. The TCJA nearly doubled it for 2018 through 2025. So, under current law, your child can shelter almost twice as much wage income with the today’s much bigger standard deduction.

This means that your under-age-18 child will owe no federal income tax on the first $12,400 of wages for 2020 unless he or she has income from other sources. Your child can use his or her wages to help keep the family afloat financially — or to fund a college savings account or contribute to a Roth IRA.

Rules for Older Kids

If you hire a son or daughter who’s 18 or older, his or her wages are subject to Social Security and Medicare taxes, like for any other employee. However, the wages won’t be subject to the FUTA tax if the child is under age 21. And, under the TCJA, an unmarried child can use the standard deduction to shelter up to $12,400 of 2020 wages received from the family business from federal income tax, or up to $24,800 if your child is married and files a joint tax return with his or her spouse.

Rules for Incorporated Businesses

If you operate your business as an S or C corporation, your child’s wages will be subject to Social Security, Medicare and FUTA taxes, like for any other employee, regardless of the child’s age. However, you can deduct the wages and the employer’s share of the related payroll taxes as a business expense.

Rules for Other Family Members

Wages paid to other relatives — such as grandchildren, uncles or nieces — will be subject to Social Security, Medicare and FUTA taxes, like for any other employee. The family member can use his or her standard deduction to shelter up to $12,400 of 2020 wages received from the family business from federal income tax, or up to $24,800 if the family member is married and files a joint return with his or her spouse.

Income Tax Advantages

When you hire a child or other family member, you get a business tax deduction for employee wage expense, plus:

For so-called “pass-through” entities, including the noncorporate entities listed above and S corporations, the wage expense deduction reduces your individual federal taxable income, your individual net self-employment income (if applicable) and probably your individual state taxable income (if applicable).
If you operate your business as a C corporation, the deduction reduces your corporation’s federal taxable income and probably your corporation’s state taxable income (if applicable).

If your business will be unprofitable this year due to the COVID-19 crisis, the deductions might create or increase a net operating loss (NOL) for 2020. If so, that NOL can be carried back as many as five tax years — potentially all the way back to 2015. The NOL carryback privilege can trigger a refund of income taxes paid for earlier years.

Got Questions?

This article only covers a few strategies that can help family businesses save taxes in the COVID-19 era. For more information or ideas about tax planning for your business, contact our tax professionals:

Daniel F. Griffin, CPA, CVA
Phone 315.701.6339 • Email [email protected]

Gary A. Grossman, CPA, CFP
Phone 315.701.6304 • Email [email protected]

Anna T. Murphy, CPA
Phone 315.701.6330 • Email [email protected]

Adam E. Panek, CPA
Phone 315.701.6328 • Email [email protected]

Steven J. St. Amour, CPA/ABV, CVA
Phone 315.701.6306 • Email [email protected]

Rick D. Shaw, CPA
Phone 315.701.6431 • Email [email protected]

Grossman St. Amour CPAs PLLC virtual doors are open and we are assisting our clients as usual on audit, accounting, and tax issues as well as matters relating to COVID-19. As a certified public accounting firm located in central New York, Grossman St. Amour CPAs has been in business for over 60 years. The firm provides businesses and individuals with accounting, audit, taxation, business planning and valuation, financial planning, investment consulting, and fraud examination and deterrence services. For more information about how Grossman St. Amour CPAs PLLC can be of service to you, contact our professionals.

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