It might seem strange that wages paid to family employees who share the same household can be recognized as expenses. For this reason, income tax law has specific requirements. In this context, we will outline the key points regarding the treatment of “Family Members Dedicated to the Business” under tax law.
Wages Paid to Family Employees (General Rule)
When calculating taxable income for income tax purposes, wages paid to family employees cannot generally be treated as expenses. However, there are exceptions to this rule.
Family Employees Dedicated to the Business (Exception)
The rules differ depending on whether the taxpayer uses the Blue Return or the White Return.
1.Blue Return Filers:
Blue Return filers may apply the Blue Return Family Business Deduction Rule. Under this rule, wages paid to family employees are recognized as expenses if:
- The wages are reasonable compensation for the work performed,
- The wages follow the methods outlined in the previously submitted declaration form, and
- The wages fall within the declared amount.
(Note: Retirement allowances are not included.)
2.White Return Filers:
For White Return filers, a certain amount, whichever is smaller between a set limit and the calculated amount, may be treated as deductible expenses.
However, this is a special provision that applies only to wages paid to family employees dedicated to the business. It is important to note that other expenses, such as rent or interest payments to such family employees, cannot be deducted as business expenses under either the Blue Return or White Return rules.
Definition of Family Employees Dedicated to the Business
Family employees dedicated to the business are relatives who share the same household with the taxpayer and are exclusively engaged in the taxpayer’s business. Whether they are “exclusively engaged” is generally determined based on whether they worked for more than six months during the tax year.
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