Final answer:
Kathy's husband would be subject to FICA taxes while her 16-year-old daughter might be exempt only until she turns 18, given the business is a sole proprietorship and not incorporated. Spousal wages are generally subject to FICA taxes, and the daughter's exemption applies to Social Security and Medicare taxes.
Step-by-step explanation:
The FICA (Federal Insurance Contributions Act) taxes consist of Social Security and Medicare taxes. For Kathy, a sole proprietor, having her husband and 16-year-old daughter as employees in her business raises specific questions concerning these taxes. Generally, wages paid to a child by a parent's business are subject to FICA taxes if the business is a corporation or partnership. However, if the business is a sole proprietorship or a partnership where each partner is a parent of the child, the child's wages are exempt from FICA taxes until they turn 18. As for the spouse, wages earned by a husband from a wife's sole proprietorship are subjected to FICA taxes regardless of the spouse's age.
It is important to note that the exemption for a child's wages from FICA taxes is applicable only for Social Security and Medicare taxes; income tax withholding requirements remain in force. Additionally, if Kathy’s business was incorporated, both her husband and daughter would be subject to FICA taxes, regardless of their familial relationship because corporate entities are considered separate legal taxpayers.
Given that Kathy operates a grocery store as a sole proprietorship, her husband’s wages would be subject to FICA taxes, while her 16-year-old daughter’s wages might be exempt only until she turns 18, provided the business does not elect corporate status. It is crucial for Kathy to be aware of the various nuances of tax law pertaining to family members working in the business to ensure compliance with federal tax regulations.