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Show Social Security changes rules Small business owners should be aware that the rules for figuring Social So-cial Security tax for family members mem-bers working together in a family business have been changed. As of January 1 , the exemption age for children was lowered to 18 and the spouses exemption was eliminated. eli-minated. This means that a husband hus-band or wife employed by the other spouse in a family business will no longer be able to avoid paying Social So-cial Security taxes. Under the old rules, a spouse employed in a family fami-ly business was exempt from Social So-cial Security withholding, as were children under 21. According to the National Association Asso-ciation of Tax Practitioners this means that the operator of family business must now withhold Social Security from the wages, make the required deposits and file quarterly reports, even though no one outside out-side the family is employed in the business. This is basically the same requirements that have always been in effect for family partnerships partner-ships and family corporations. The NATP says that the change in the law means that a single-owner single-owner family business should do some tax planning. For example, if a husband owned own-ed a family business in 1987 and employed his wife, he could reduce his own Social Security liability by increasing his wife's wages on which there was no social security tax and reducing his own income which was taxed at 12.3 percent. In 1988, the husband will pay at the 13.02 percent self-employment rates, and will have to withhold 7.51 percent from his wife's salary and match this as the employer's em-ployer's share, for a total of 15.02 percent. The employer share is, however, deductible as a business expense. In this case adjusting the wife's salary to a lower figure will reduce the total Social Security liability. lia-bility. A second scenario is if the husband's hus-band's income is near the maximum max-imum for Social Security withholding. withhold-ing. If it is near that maximum, reducing the wife's income might produce further savings by making part of the husband's income exempt ex-empt from Social Security. The age of the people also could be a factor in planning. If the husband hus-band is nearing retirement age, it might benefit both him and his wife to shift income to him, particularly if the wife has not had a lot of Social Security income in the past. Doing that, would improve the Social Security retirement benefit for the husband and for the wife who would then draw on his base. Family business operators should consult their professional tax practitioners for advice in these areas, the NATP advises. |