Richard A. Lindsey, CPA

Lindsey & Waldo, LLC – Certified Public Accountants

  • May 12

    I’ve written before about what a good tax planning technique hiring your children can be. (See “Hiring Your Children for the Summer: The Job of Last Resort or Just Good Tax Planning,” Taxing Times, June 2015.) It can be an effective way of shifting income from your high rate to as low as zero percent! It can also be good for the kids. However, as a recent tax court decision demonstrates, it’s important to dot your i’s and cross your t’s.

    The case involved Lisa Fisher, a New York attorney, faced with a common dilemma to find summer care for her children, all under the age of nine. So, during the summer, she brought them into her office two or three days a week where they shredded waste, mailed letters, answered phones, greeted clients, and copied documents.

    Fisher took deductions for the $28,770 in wages she paid her kids over a three year period. But, she didn’t keep any payroll files or issue any W-2s. She didn’t keep any records substantiating the work they did or establishing that she paid “reasonable compensation” for the work performed. Nor could she present any documentary evidence, such as cancelled checks or bank statements, to verify that she actually paid them the wages she deducted.

    You know where this is headed. The IRS disallowed the deductions for the children’s wages and imposed an accuracy related penalty. The Tax Court affirmed that decision.

    Bottom line: Hiring your children to work for your business, or rental properties, can be perfectly legal tax planning. But, you have to follow the rules and document everything in order to protect the benefits.