Tax Risks Emerge for Employees Buying US Bed and Breakfasts

Bed and breakfast owners selling their businesses to employees may trigger unexpected increases in Social Security and Medicare premiums for the new owners ^[1].

This financial shift matters because it can create a hidden tax burden for workers who transition from staff to ownership. While the sale may seem like a seamless transition, the change in employment status alters how federal payroll taxes are calculated and paid.

The issue arises because an employee's existing Social Security and Medicare contributions continue after the sale ^[1]. When a worker becomes the owner of the business, they move from being an employee to being the employer. This transition can lead to a spike in premiums as they must now account for both the employee and employer portions of these taxes [1, 2].

In one instance, a man in his late sixties ^[1] spent decades ^[1] running a bed-and-breakfast out of the same building where he lives. For such owners, selling the business to a trusted employee often feels like the most natural succession plan. The owner said, "Selling the business to her feels right" ^[2].

However, the financial reality for the buyer can be stark. The transition into ownership means the buyer is no longer just receiving a paycheck but is responsible for the total tax liability of the operation. This creates a "tax trap" where the new owner may not have budgeted for the increased cost of federal insurance premiums [1, 2].

Financial advisors suggest that buyers conduct a thorough review of payroll tax obligations before finalizing a purchase. Understanding the difference between a W-2 employee and a business owner is critical to avoiding these surprises. Without a clear plan, the cost of these premiums can erode the early profits of the newly acquired business ^[1].