One of the Most Abused Tax Strategies: Hiring Your Children

One of the Most Abused Tax Strategies: Hiring Your Children

You have probably heard this one:

"Just [theoretically] hire your kids and pay each one $15,000. They will owe no tax and you get a big business deduction. Plus no FICA taxes, either, for both of you."

Most people think this works in real life. In reality it is almost entirely theoretical. 

Many believe they can simply claim the deduction without actual work, without actual payment, and without documentation.

The IRS does not allow this at all.

Here is what actually matters:

1. The child must truly work:

A one year old is not cleaning your office.

Work must be real, age appropriate, and necessary.

2. The pay must be reasonable:

A five year old sweeping for ten minutes a week cannot earn $15,000 per year.

That is effectively $1,800 per hour if done for 10 minutes per week. 

Minimum wage is usually the only defensible rate.

3. You need real documentation:

Job description.

Timesheets.

Actual payments from the business account

A bank account in the child’s name.

Proper payroll and bookkeeping.

If it appears to be a sham, the IRS treats it as one.

4. The money belongs to the child:

You cannot take it back.

You cannot use it for family bills.

Once paid, it is legally the child’s property.

5. "My baby is a model":

If you claim modeling work, the IRS will ask to see the advertising materials, when they were published, and how they promoted your business.

Most parents do not want to use their children in marketing, which already makes this claim a major audit red flag.

Bottom line:

This strategy can work, but only for older children, doing real work, at reasonable wages, with full documentation, and with real payments that the child actually keeps.

For most families it is not the magic deduction they believe it is.