Avoid Family Employee Tax Traps

“The only rock I know that stays steady, the only institution I know that works is the family.”—Lee Iacocca

You can get some nifty tax breaks if you employ family members in your medical practice, including a business deduction for salaries as well as benefits like health insurance coverage. If you opt to go this route, however, you must make sure your family members are legitimate employees with defined duties and a set salary.

You should also withhold the proper amounts for federal and state income taxes and Social Security, and issue a W-2 at the end of the year. If you don’t, the IRS may claim that your family members aren’t bona fide employees and deny all employment-connected deductions.

Employing your children can also be a useful tax strategy, transferring income to them that would otherwise be subject to your tax rate, and allowing that income to be taxed at their lower rate. Again, to avoid hassles with the IRS, you must be prepared to show that your child had actual work to do and that you paid a fair but not excessive wage for that work. An added benefit is that the children can put some of their wages into a Roth IRA, which will eventually provide them with tax-free income.

Talk to your tax advisor for more details.

25%—Percentage of small business owners who say they know the value of their business.(BusinessWeek, 2008)

Read More:

• Rules for Hiring Family Members

• Five Guidelines For Hiring Family or Friends