Taxes Made Simple

A reader asks: I have a sole proprietorship and employ my spouse and pay futa tax on him. However I was recently told that I must exempt him from futa- I thought I as the owner was exempt but it was optional for the spouse- thus him being able to benefit from unemployment should the business fail. I additionally was told that if I were a corporation he would not be exempt. Do you know if I can still pay futa on him and have him be eligible for unemployment?

My answer: The following quote is from IRS Publication 15:

"The wages for the services of an individual who works for his or her spouse in a trade or business are subject to income tax withholding and social security and Medicare taxes, but not to FUTA tax."

My understanding is that, if the business were a corporation (or an LLC electing to be taxed as a corporation), each spouse would be an employee of the corporation rather than of the other spouse. As such, I believe that both spouses would be subject to FUTA.

Want to learn more about the entity-selection decision? Take a look at my related book: Surprisingly Simple: LLC vs. S-Corp vs. C-Corp Explained in 100 Pages or Less.