Regs restore FICA/FUTA family employment exemptions

Beginning in 2009, single-member limited liability companies (LLCs) and other disregarded entities that didn’t elect to be treated as corporations for federal payroll tax purposes were automatically treated as corporations. Upshot: This change to corporate status for payroll purposes wiped out the FICA/FUTA exemptions for employing family members and members of religious orders.

Now, final and temporary regulations have re­­stored those exemptions. The regs became effective Nov. 1, 2011, but you may apply them to wages paid beginning Jan. 1, 2009. (76 F.R. 67363, 11-1-11)

The law of unintended consequences. Corporations can’t take advantage of the FICA/FUTA exemptions for employing family members or members of religious organizations. And therein lies the problem for disregarded entities, which are disregarded only for payroll tax purposes. The regs restore these FICA/FUTA exemptions:

• Children under age 18 who work for their parents’ business, and children under age 21 who work for their parents, but not for their parents’ trade or business (e.g., they work in domestic service in their home), are exempt from FICA.
• Regardless of the job, children under age 21 who work for their parents are exempt from FUTA.
• Spouses who work for their spouse’s business are exempt from FUTA. Spouses who work for their spouse, but not for their spouse’s business, are exempt from FICA and FUTA (e.g., they work in domestic service in their home).
• Parents who work for their children aren’t subject to FUTA. Parents who work for their children, but not in their children’s business, are exempt from FICA and FUTA.
• Members of religious orders who work for other members are exempt from FICA.

Backup withholding. The regs also clarify that, with the exception of qualified Subchapter S subsidiaries, owners of the disregarded entities are responsible for backup withholding and filing Forms 1099-MISC.