Employingyour kids is a great deduction for parents of minor children who have a netincome-generating Schedule C business. For2012 a dependent can earn up to $5,950 in wages (or a combination of wagesand up to $300 in “unearned income” – i.e. interest, dividends, capital gains)and pay no federal, and probably no state, income taxes. Contributions to atraditional IRA can add another $4,000.00 to that figure (however, in the longrun, it is probably better to contribute to a ROTH IRA in such a situation).
Plus,if the child is under age 18 you do not have to withhold or pay FICA (SocialSecurity and Medicare) taxes, and probably state unemployment and disabilitycontributions, on the payments. Wages paid by a parent’s unincorporatedbusiness to a dependent child under age 21 are also exempt from FUTA (federalunemployment) tax.
Theparent gets a deduction on his/her Schedule C for the wages paid, which willreduce income tax, self-employment tax, and Adjusted Gross Income.
However,to be deductible the wages must be for actual legitimate services to thebusiness as an employee, the child must actually be paid the wages, and theamount of wages paid must be reasonable for the type of services provided.Routine family chores (see the Court’s discussion below) will not qualify, youcannot just claim a deduction and not actually give the money to the child (ordeposit the money in the child’s IRA account), and you are not allowed to payyour 10 year old son $50 an hour for sweeping up your office.
InMichael D and Christine Alexander vs Commissioner (TC Summary Opinion 2006-127)the parents had three home-based businesses – a tree farm, a tailoringbusiness, and a beagle-breeding business.
Theirson, a 21-year old college student, helped with his mother’s tailoring businessduring summer break. His jobs included getting supplies at a fabric store,general cleaning and shampooing the rug in the sewing room, and accompanyinghis mother to the store.
Theirtwo minor daughters worked in the beagle-breeding business walking the dogs,cleaning and cutting the grass in the beagle yard, hauling garbage, bleachingdog bowls, treating dogs for fleas, clipping nails and hosing kennels.
Noneof the children received an actual pay check. The son received $4,000 over thecourse of the year, most before he actually began work. A type of “drawing account”was kept for each of the daughters. Earnings were accumulated, and the girlswere given money as they needed it, or the parents would purchase items for thegirls and deduct the amount from their “account”. No quarterly (941) or annual(940, W-3, W-2) payroll tax returns were prepared for any of the wages claimedas a deduction.
TheCourt felt that “many of the tasks [the son] performed were in the nature ofroutine family chores such as cleaning, vacuuming, taking out garbage, andaccompanying [his mother] on shopping trips. Such chores are part of parentaltraining and discipline rather than the services rendered by an employee for anemployer.” This, plus the fact that the son’s wages were not paid as earned andthere were no payroll tax returns filed, caused the Court to conclude that thepayments made to the son were not deductible as wages.
WhileI agree with the Court on the son, I felt that the daughters could havequalified as true employees. However, the Court disallowed the deduction for theirwages as well.
Itis very important that you “cross your t’s and dot your i’s” when it comes todocumenting a deduction for dependent wages. You must make sure you pass the“duck test” (if it waddles like a duck and quacks like a duck…). Forget that theseare your kids and treat them as you would any other employee.
·Create a written job description for each “position” outlining the duties andresponsibilities involved.
·Pay the kids on an hourly basis.
·Use a time card to document hours worked and work performed.
·Write a company check as payment each week or every-other week.
·Even though the wages are not subject to FICA and FUTA tax and probably alsostate unemployment and disability contributions, file all appropriate quarterlypayroll tax returns, such as the federal Form 941 (you can indicate that thewages are exempt from FICA on the form), submit an annual federal Form 940 or940EZ indicating the amounts paid as “exempt”, and issue a W-2 in January toreport the wages paid.
·If you have other employees make sure the kids’ wages are included on thequarterly and annual payroll tax returns.
{FYI - this is the type of information discussed in my "The Schedule C Notebook" - rdf}
TTFN
Hiç yorum yok:
Yorum Gönder