Family, Food, and Finances: Tax-Efficient Planning for Your Restaurant

At a glance

• The main takeaway: Family-owned restaurants and franchises must understand the tax implications that can come with employing family members in the business.
• Impact on your business: Proactive tax planning and succession planning can be the straw that makes or breaks your family-owned enterprise.
• Next steps: If you’re thinking about employing family members in your restaurant operations or looking for tax-efficient strategies for family employment, Aprio’s Restaurant, Franchise & Hospitality team is here to help.

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The full story:

Tax issues play a significant role in successfully employing family members in your restaurant or franchise business. It doesn’t just involve determining who will take over the next generation of leadership; employers must understand certain tax situations, IRS rules, and succession planning complexities that can directly impact the success of their business. 

The good news? Aprio’s Restaurant, Franchise & Hospitality team is here to give you proactive advice and guidance to optimize your tax position in your restaurant operations. Keep reading to learn more.

Family business: Know your tax situation

In general, family businesses can bring several different tax complexities to the table, depending on whether relatives are involved in operations. Whether it’s an eldest child working behind the counter at the restaurant or spouses running the business together, it’s important to understand the different tax implications associated with family employment.

Above all, owners must prioritize careful planning to optimize tax benefits, ensure the business thrives across generations, and secure a smooth financial future. Certain tax obligations depend on the relationship and business structure you have in place. The IRS explains the different types of tax obligations for different businesses:

Children employed by their parents

While it’s a great idea to introduce the family business to your children at an early age, it’s also important to be aware of child labor laws. These laws are in place to prevent children from overworking or performing unsafe tasks that can hinder their development. Abiding by these laws and regulations will help you create a safe and positive work experience for the family and the business itself and promote safe employment practices.

If the business is a parent’s sole proprietorship or a partnership in which both partners are parents of the child, there are different types of wage structures depending on age:

• Children of any age are subject to income tax withholding.
• Children ages 18 and older are subject to Social Security and Medicare taxes.
• Children ages 21 and older are subject to FUTA tax.

If the business is a corporation, estate, or partnership in which one or no partners are parents of the child:

• Payments for services by a child are subject to income tax withholding, Social Security, Medicare, and FUTA taxes regardless of age.

Parents employed by their child

If the business is the child’s sole proprietorship, payments for services by a parent are:

• Subject to income tax withholding, Social Security, and Medicare taxes.
• Not subject to FUTA tax regardless of the type of services provided.

If the business is a corporation, a partnership, or an estate:

• The payments for the services by a parent are subject to income tax withholding, Social Security, Medicare, and FUTA taxes.

Tax strategies and opportunities

While there are several rules to be mindful of, there are also lucrative strategies that can help you maximize your tax benefits and optimize tax opportunities when employing family members. Here are a few tactics that family-owned restaurants and franchises can implement to maintain regulatory compliance and even reap additional savings.

Turn high-taxed income into tax-free or low-taxed income

As we mentioned above, you can actually shift some of your business earnings to your children as wages for services performed. Before you do this, it is important to make sure that the work your child is performing is legitimate and that the salary you are paying them is appropriate and within reason compared to the market.

Be mindful of tax withholding and Social Security taxes

If you do employ one or several of your children, then you likely will have to withhold federal income taxes on your child’s wages. If your business isn’t incorporated, you can save some self-employment (i.e., Social Security) tax dollars by shifting some of your earnings to your child. As we mentioned above, services performed by a child under age 18 while employed by a parent aren’t considered as “employment” for FICA tax purposes.

FICA and FUTA taxes

Note that FICA and FUTA exemptions apply if your child is employed by a partnership consisting solely of their parents. There is no FICA or FUTA exemption available for owners who employ a child in a business that is incorporated or a partnership that includes non-parent partners.

Retirement and gifting

The way in which owners approach gifting and succession planning is highly dependent on family goals and dynamics. For instance, you may decide to set up a trust for one child and transfer the business itself to another child if they are interested in taking the reins once you have retired. It is essential to have proactive, purposeful succession planning discussions with your family members long before your projected retirement date to ensure smooth communication and effective transfer down the line.

The bottom line

Employing family members in your restaurant can be a great way to bring trusted people into your business, but the decision doesn’t come without certain tax complexities and requirements.

To ensure you are staying compliant and maximizing any potential tax benefits, Aprio’s Restaurant, Franchise & Hospitality team can work with you to create a more personalized tax strategy tailored to your specific restaurant operations. Contact us today to discuss your family business’s needs.

Related Resources/Assets/Aprio.com articles/pages

Tax Information For Businesses

Married Couples in Business

Family Help

Publication 590-A (2023), Contributions to Individual Retirement Arrangements (IRAs)