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Thursday, 03 September 2009 00:00

Employing Your Children

If you own a business, you may want to employ your children. Not only will this provide them with valuable work experience, but it presents a way for you to offset some of your own income. But the IRS may closely scrutinize these payments. So what can you do to avoid the IRS finding a deficiency during an audit which may result in additional tax, penalities and interest?

In general, if you wouldn’t compensate a non-child employee in the way you plan on compensating your child, you need to take a look at a number of factors. You should attempt to treat your child, to as great an extent as possible, like any other employee. For instance, failure to actually give your child the money, and put it in their own bank account, or making payments at opportune times, such as holidays, birthdays, and dates when tuition is due, can be very damaging. If you fail to provide a detailed arrangement or formula for compensation, the IRS may also disapprove. Not keeping adequate, contemporaneous records of the child’s hours worked and the tasks competed can potentially destroy the arrangement in and of itself. Failing to pay employment taxes and file returns on behalft of your child is also viewed negatively. And remember, wages must be “age appropriate.”

If you would like to discuss this tax matter or any others, our tax specialists would be more than happy to assist you so that you can, to the greatest extent possible, avoid potentially expensive tax bills in the future.

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