Quick Tax Tip: Please Don’t Just “Hire Your Kids”
A tax strategy we see touted FAR too often on social media is hiring your kids.
The logic is as follows:
If you file as a Schedule C or Partnership, and hire your children, those wages are not subject to payroll taxes.
Additionally, if the child’s wages are under the standard deduction, they will not owe federal taxes on that earned income.
With that earned income, they can contribute to a Roth IRA and start saving for retirement.
As with any good con, this sounds great if you don’t pay attention to what’s missing from the pitch. In this case? Simple, crucial details, Below are some ways taxpayers fail and expose themselves to significant liability when attempting to utilize this strategy:
Not following labor laws and having children work more hours than are legally allowed
Not paying them a fair-market wage for tasks being performed (eg a 10 year old would not realistically be making $100/hr)
Paying them for tasks NOT related to the business (eg chores around the house)
Not filing appropriate payroll forms with state and federal governments (quarterly and yearly reports, including a W-2)
If the rules ARE followed - such as a W-2 is issued, employment laws are abided by, a fair wage is paid for work being performed, the work is age appropriate, this is a legitimate tax strategy. But the key takeaway here is - you need to be provide appropriate documentation to support your position.
