Q. My business is set up as a single member LLC. My only employees are my husband and two children. A couple of years ago, my accountant told me I had to begin paying unemployment FICA and Medicare taxes on all salaries. I now do my own taxes and read somewhere that the IRS decided late last year that these taxes will not be required for 2011 and shouldn't have been required in the years that I paid them. Is this correct? If so, is it worth the cost to hire an accountant to amend my prior returns? Should my old accountant do this for free since he's the one that told me I had to pay these taxes?
You could ask, but I doubt if your previous tax preparer will feel that he has any obligation to amend your past returns for free. He didn't make a mistake; the IRS just clarified a position that had unintended tax consequences for single-member limited liability companies. Beginning Jan. 1, 2009, the IRS required the single-member LLC to be treated as a corporation for payroll tax purposes. Late last year, they announced that they had not intended to eliminate the payroll tax breaks for family employment in a single member LLC. They will now allow a single member LLC to be treated as a proprietorship concerning payroll taxes for a spouse or child younger than 21. This became effective Nov. 1, 2011, and is retroactive to Jan. 1, 2009. This special treatment also has an odd expiration date of Oct. 31, 2014.
Under the family employment payroll tax exemption rules, you do not have to pay federal unemployment tax on employed children younger than 21 or an employed spouse if your business is structured as a sole proprietorship, partnership or single member LLC. This can save 0.008 percent of the first $7,000 of wages, or $56. Employed children younger than 18 also are exempt from employee Social Security tax (4.2 percent in 2011) and Medicare tax (1.45 percent). The business also would benefit from not having to pay the employer's Social Security tax (6.2 percent) and employer Medicare tax (1.45 percent).
