Hiring your kids can save you taxes. If you hire your children, they are under 18 years old and your business is unincorporated, neither the business nor the kids have to pay Social Security or Medicare taxes on their wages. Shifting income to your children this way can also reduce your family’s income tax bill, because your minor children are likely in a lower tax bracket than you are. But remember: pigs get fat and hogs get slaughtered.
Patricia Diane Ross was a busy single mom with three kids, ages 15, 11 and 8. She had multiple unincorporated businesses that she ran from her home and her office. She said that she employed her children in her businesses and that they did age-appropriate office work. She prepared and filed Forms W-2 and other employment tax returns for her children.
When she produced evidence of payment of wages to her kids, Ms. Ross produced for the Tax Court credit card receipts for pizza and for tutoring services. She said that rather than actually paying her children directly, she bought things of value for them “at their direction.” Writing them a paycheck was just too much trouble, she said.
The Tax Court was not convinced that the kids were actually being paid for working in the business. The court could not recreate the hourly rate that Ms. Ross said she paid her children. For example, she said she paid the oldest child $10 per hour. The court calculated a rate of $30 per hour for 2007 and only $9 per hour in 2008. The amounts she was deducting seemed to have little correlation to the amount of work her children were purportedly performing. Most importantly, the Tax Court pointed out that a parent has a legal duty to support his or her children if able to do so and that feeding and educating one’s children is support. No deduction for Ms. Ross, just taxes.
So, be a pig, not a Patricia.