Can a small business owner pay a child or grandchild?
Q. My father has a small business and he wants to start paying my kids, but they’re only 10 and 8 and can’t really work. He says it’s legal. What’s the real deal?
A. Your dad will find some tax savings with this move.
Business owners can employ their children or grandchildren — if they actually work for you.
Young children — 10 and 8 in your case — would not be entitled to a high wage, but they can indeed be paid if they work.
“An advantage to paying them is there are no federal employment taxes on the child’s wages under 18 and no federal income tax up to the standard deduction amount (around $6,000) for your children while your business will receive a tax deduction,” said Ken Bagner, a certified public accountant with Sobel and Co. in Livingston.
Bagner said the business must be either a sole proprietorship, a single member LLC treated as a sole proprietorship or a husband/wife partnership/LLC. The employment tax exemption is not available for a corporation, he said.
You also need your child to complete the paperwork any employee fills out when hired, he said.
“Be extremely careful if you move in this direction as the IRS is on the lookout to ensure the family members are being paid for actual work performed,” Bagner said. “It is recommended that you document the work children performed and to create a job description for their services.”
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Karin Price Mueller writes the Bamboozled column for The Star-Ledger and she’s the founder of NJMoneyHelp.com. Click here to sign up for the NJMoneyHelp.com weekly e-newsletter. Like NJMoneyHelp.com on Facebook and follow it on Twitter.