Today TaxMama hears from Alice who’s disputing her husband’s contention, “My husband is a real estate agent with a major brokerage. Last year we paid four of our children to work for him on various projects. All four are 18 and under. I wrote a check to myself and paid them cash. My husband insists that in order to claim it as an expense on the Schedule C, the check must be written to them and deposited in their bank account. I say we can give them cash and still claim it as an expense. Who is right?”
This was really hard for me to answer. How can you nicely tell someone, “What! Are you a total, blithering idiot?” I couldn’t find a way. Instead, I’ve changed the names and here’s what I said.
I don’t want to be responsible for starting a fight between the two of you, so please don’t show your husband my response.
How can you even remotely believe that you can pay your children cash and expect to take a business deduction on your tax return for payroll? Don’t even go there!
IRS is already skittish enough about people hiring their children in the first place, because so many people just put the payrolls on the books and never have their children actually work for them. You certainly don’t want to give them more fuel to believe you’ve committed tax fraud!
Not only may you not pay them cash that way, but they must be formally placed on your payroll.
In fact, there are benefits in the tax code when you pay your children on payroll and they under 18. So, that’s a good value.
I don’t even know if you can fix it at this point.
You’d have to file payroll tax returns for all those quarters. You’d have to have back-up to prove they worked, like time cards or time sheets showing what work they did, when. You’d have to have proof you paid them. Do you have any of these things? Probably not.
Why will you need all that?
Because IRS will want to know why the payroll tax returns weren’t filed in the first place. And you’ll need to prove your reason. Ignorance may work as an excuse; but don’t hold your breath.
And yes, you’re husband is also right about the fact that the checks must be deposited to each child’s own bank account. Personally, I’d skip it for last year – and do it properly this year.
Chapter 9 in Small Business Taxes Made Easy will explain everything you need to know about hiring your children – and how to document their employment well enough to survive audit.
And remember, you’ll find answers to questions about hiring family and all kinds of tax issues, free. Where? Where else? At TaxMama.com[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting news about the IRS Exam. Please click on the subscribe link and join us.]
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- Small Business Taxes Made Easy :: Chapter 9 – Hiring Family