How to Pay Your Children to Work for You With the Blessing of the IRS
Putting your kids to work can help you save on taxes.
Hiring your kids to work in your business sounds like a good strategy. It gives them something to do. It introduces them to the culture of your business. It might even ignite a career ambition. It can also help you save on payroll taxes, but only if you are a sole proprietor or you and your spouse are partner owners of the business. Any business owner can deduct the wages of a minor child as a business expense at tax time.
Give each child a job that is both necessary to your business and within his or her capabilities. The IRS requires that the work you hire a child to do be a set of tasks he or she might reasonably be expected to perform. You cannot, for example, hire your child to do high-level engineering work or draft architectural drawings unless he has somehow managed to acquire the requisite training and experience. Paying a child
or teen to ferry lunches to staff members or perform light office work is more likely to meet the reasonableness standard. Hiring your son or daughter to entertain the staff by playing music at lunchtime, however, likely won't meet the standard.
Pay each child at market rates. Paying $50 per hour for a child to sort mail would be a red flag to IRS personnel. The wage should be in line with what you would pay anyone else for the work.
Keep careful records of your children's earnings and hours worked. If the IRS does audit you, you'll be forearmed.
Send the IRS a W-2 form for each child in January of the following year. This further proves that the child was officially a payroll employee.
Deduct the child's wages when you file your business tax return. Those wages are an expense you can deduct on Schedule C of Form 1040 if you are a sole proprietor, or Schedule K-1 (Form 1065) if your business is a partnership.Source: finance.zacks.com