Can You really hire your children to help in your daycare?
This question is coming up more and more these days. The answer is a resounding Yes.
The IRS in Pub 13 (circular E) employer’s tax guide, says under Family Employees. Child employed by Parents. Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business is a sole proprietorship. These wages are also not subject to Federal unemployment tax (FUTA). These wages may be subject to withholding taxes depending on how much you are paying. Will the child exceed the filing limit for filing an income tax return? The limit is $5150.00 for year 2006.
The real question is what you can pay them for and what records you need to keep to justify the deduction. Above it states very clearly that the payments must be for work performed. There must be an employee, your child, and an employer you the child care provider for the deduction to be valid.
I advocate treating your child like any other employee that you would hire. When you hire a new employee you need to fill out two forms, form W4 and form I9. You may also need to fill out certain state forms. Wisconsin has a new hire report that needs to be filed and submitted to the state. You need to keep a file for each of your children. The above forms should be in that file. You will be paying your child for work performed. When you hire other employees for work performed that employee fills out a time sheet and you pay that employee for those hours at an agreed upon rate. Paying your child is no different. You need to keep record of the hours that your child worked and a record of the payments that were made to that child. At the end of the year you will need to issue a W2 to your child.
If you have children under the age of 18 and they are helping out in your small business it makes a lot a sense to pay them out of your business when it come to your income tax return. . Theses wages are a deduction from you business tax return and can go towards setting up educational accounts or simply getting spending money out to your children.
The “Daycare Diva”, Christine G. Groth, is the creator of “The Guide to Instant Daycare Profits”. To learn more about this step-by-step program and to sign-up for her FREE “How to Start a Daycare” tips and articles, visit http://www.ExpertsAtDaycare.com