A business owner that reports business income and expenses on Schedule C of form 1040 has a special opportunity to reduce their income and self employment taxes.
Suppose the owner has some children who can work in the business. If you keep the records of when they worked, how many hours and how business related, then you have a possible expense deduction if you pay the children before the end of the year.
There have been some court cases where the taxpayer was audited by IRS and the deduction for wages paid the children was the issue. Most cases were won by the taxpayer, if they had good records and the amounts paid to the children were fair and reasonable (what would have been paid to an unrelated worker).
You don’t have to pay the children each week or even each month. If they are paid in the calendar year, it counts. If you pay by check, you may have to go to the bank with them to get the check cashed. In the unusual event the children want to save some of the money, you can help them set up a savings account.
Like many income tax matters, documentation is important. Describe the work they do in detail. It would be OK to even get a few pictures of them working. Then you need to pay them what you would have paid a stranger.
We’ve seen many instances where the children were paid less than reasonable. That’s not good and may encourage teenagers to go work at a fast food place where they see their friends.
If you’re the owner of a business that reports on Schedule C, then there’s no need or requirement to hold Social Security or Medicare taxes out of their wages. There’s a special provision that applies to sole owner businesses. The expense will reduce your profits, income tax and self employment tax.
If your business is a corporation (regular “C” or “S”) or a partnership, it’s still OK to hire your children and pay them for their work. The child can fill out a W-4 form that indicates no income tax needs to be withheld from the wages. The Standard Deduction of $6,350 can be claimed by the child with the exemption still being claimed by you on your return. Just be sure the child does file an income tax return and doesn’t claim their own exemption.
Did you hear? “Keep your sense of humor. There’s enough stress in the rest of your life to let bad shots ruin a game you are supposed to enjoy,” by Amy Alcott Golfer.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.