|
|
| |
IRS Targeting Family
Member's Wages on Schedule C
One area the IRS appears to be
targeting lately is businesses reporting income on
Schedule C and deducting wages paid to the owner's
children or other family members. Hiring your
children in your business can be an effective tax
planning strategy. Not only can you shift
income to a lower tax bracket, wages paid to your
children under the age of 18 are exempt from Social
Security and Medicare taxes and it reduces your own
income subject to self-employment taxes.
Spouses are sometimes employed not only to provide
the spouse with Social Security credits and the
ability to defer income through the use of IRA's,
401(k), or other retirement plans, but also to set
up a deductible medical reimbursement plan.
However it is very important that you
follow appropriate documentation guidelines to make sure
this withstands IRS audit scrutiny. Here are some
things we recommend doing to help you through an audit:
-
Have the employee keep a timesheet
showing the dates, hours worked, and services
performed
-
Have the employee prepare the
normal employee documentation such as a W-4 and Form
I-9
-
Pay the child or spouse by
business check and deposit the check into an account
under the their name. In the case of a child
deposit the check into an account under their name.
-
Make sure the work performed is
directly related to your business
-
Pay the child a reasonable wage
for their age and the service they perform.
Their wages should be similar to amounts paid for
similar services by similar businesses under similar
circumstances, with adjustments made for their age
and experience.
-
Also, make sure the payroll is not
being deposited back into your own account. In
other words, don't deposit the paycheck in the
child's bank account only to move it back into your
own account.
The IRS appears to be taking a tough
stance on this issue. If all aspects of this
activity is not arms-length, the IRS is disallowing the
the deduction but ALSO imposing penalties and interest.
|
Simple.
Convenient. Smart.
Complete Payroll, Inc.
380 N. Terra Cotta Rd
Suite D
Crystal Lake, IL 60012
815.788.2932
|
