Harald Dunn and his wife Evadne operate a successful snack packaging business, H

Question

Harald Dunn and his wife Evadne operate a successful snack packaging business, Healthy Snacks. The bulk buying of the raw materials (nuts, dried fruits, etc), the packaging and delivery to corporate area shops are done by the members of the family.

The accounts for Mr. Dunn’s business at 31st December 2014 showed a profit of $4,500,000 after charging:

1. $180,000 depreciation of equipment and office furniture;

2. $750,000 for salary to his wife Evadne who supervises the office, $496,000 to his 18 year old son Shane, and $1,720,000 to himself.

3. $78,000 interest on a loan he had obtained to expand his business 3 years ago

Shane is a part-time student at a University. What is his tax liability, if any?

Explanation / Answer

One of the advantages of operating your own business is hiring family members. However, employment tax requirements for family employees may vary from those that apply to other employees. The following information may assist you with pointing out some differences to consider.

Payments for the services of a child under age 21 who works for his or her parent in a trade or business are not subject to Federal Unemployment Tax Act (FUTA) tax. Payment for the services of a child are subject to income tax withholding, regardless of age.

In this case Shane is part time student in a university, it means he is a full-time employee in a corporation which is owned by his father.

So his income is totally taxable according to the norms of IRS.

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