Hiring your kids for your home business

[cheapdoggy]

Does anyone hire their children for their home based business? My wife does daycare in our home and we want to hire our two older boys 12 and 9
to help out their mom. Stuff like sweeping, cleaning, reading stories and similar stuff. How do I have to pay them? I have read about this for tax reasons (shifting income) but am curious as to how it actually plays out.
Thanks
Mike

[MonkeyMama]

Well, 2 things.

1 - You have to pay a reasonable wage for the work. You can pay them a little more than you would a stranger, but not $100/hour or anything.

2 - This needs to be paid in the form of wages (taxes withheld, etc.)

The general rule is to pay your child the amount of the minor's standard deduction. Then their wage minus deduction puts their taxable income at 0. (If this amount is reasonable of course).

So you would not have to withhold income taxes, but still pay social security and all that. You can hire a payroll service to do a paycheck a year or something if you like. Would have them do the payroll forms and the W-2s, etc.

You see all this is only worthwhile if you are in a big tax bracket.

It really depends on state. In California you would never dream of paying your children other than as taxable wages. California is pretty notorious for reclassifying subcontractors to employee status with big penalties and such. (To them everyone is an employee). Other states you can maybe just pay them as a contractor with no taxes withheld - I am not sure.

There are also some exceptions to the social security and local tax withholdings but I thought those were by state as well. May want to talk to a tax professional to set it all up - then you can take care of it going forward.

[cheapdoggy]

Well we wanted to do this for last year to deflect some income off of us but the accountant said we needed documentation dated last year so it looks like 2007 is going to be it. Thanks for the response
Mike

[PrincessPerky]

but they are 12 and 9...is that legal?

I do think them helping work is right, just unsure of legality.

[MonkeyMama]

Yes it is legal.

I have had clients who wanted to pay their 3-year-olds $5k/year. Now that's an issue - child labor may come into play - hehe.

I did work for my parent's business when I was 9, 10, 11, 12. Great age to do just a little bit of help for pay. They probably help somewhat anyway, right?

[JBinKC]

You can hire kids for a home based business but I would make sure the of the state's child labor laws before I would do it.

If you do so as long as the business is not incorporated and you pay a fair wage you could pay them their standard deduction and exemption (if you don't claim them) income and social security tax free until they turn 18.

[Homebody]

I hired my teenage kids through my business. It was great. Then I closed the business and became a sole proprietor, self-employed transcriptionst. That was 10 years ago. My older children have both been subcontractors, but I believe they were both over 18 or turned 18 within the first tax year of being subcontractor.

I have a home office and have never been audited. It must be my industry because I live in California.

[ericmedem]

On another note if you have an online business you can hire your kids to be models for your website (think of what hollywood kids get for modeling.). Also if grand parents wanted to fund an IRA for a kid, you can also use the working kid technique.

An interesting side note. One of my accountants was a former IRS agent told the story of a family that had been "hiring there kids" for 5 years to work at there outside of the home business cleaning and sweeping. Well, they got audited and the Agent asked the kids where the restrooms were at the business and they didnt know, needless to say they had 5 years back taxes to make up