Tax Facts

Hiring a Family Member?

Thinking about hiring your child to work for your business? The IRS expects that you will be following some rules if you decide to, so it's a good idea to become familiar with those rules prior to bringing Mini Me on board and taking the payroll deduction for it. Here are a few main ones:

The child must actually be an employee and that means they must actually be doing some productive work for the business and not sitting in a chair playing video games. On the other hand, the services they provide don't have to be along the lines of "resident genius" either. As long as they are doing work that is common and accepted for your type of business and helping things move along in the daily grind, then you're okay.

Make sure you follow all the paperwork requirements that you normally follow when hiring anyone - that means filling out the W-4, the I-9 and so on. Keep that paperwork in a file for them, just like you would any other employee.

Pay them on payroll. You have that already set up for other employees, so it should be easy to add them on the payroll service. Most services or providers will not charge extra for this additional employee. If so, it should be nominal.

Finally, make sure you pay your child a reasonable salary for what they are doing. If they are packaging up widgets for shipment, then you probably shouldn't be paying them a CEO's salary. A good way of considering what a reasonable salary would be is to think of how much you might pay another person for the same type of work. And never pay by cash. Pay by check and have it deposited into your child's own bank account so it is clearly their income.

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