It’s been awhile since we offered one of our technical Client Alert letters. (Of course, it’s also been awhile since any change in tax law gave a reason to alert clients!) But on March 8, the Tax Court issued a cautionary decision that applies to all of our clients who hire their minor children to help manage their businesses or investment real estate. That decision gives you the chance to score points for helping them avoid problems, and let them know you’re staying on top of the changing laws that apply to them.
Here’s the text:
How NOT to Hire Your Kids
Hiring your children to work for your business or rental property can be an effective way to shift income that would be taxed at your highest rate to their rate, which can be as low as zero percent. It may even be good for the kids! However, as a recent Tax Court decision demonstrates (Fisher v. Comm’r, T.C. Summary Opinion 2016-10), it’s important to dot your i’s and cross your t’s.
Lisa Fisher is an attorney in New York who faced a common dilemma finding care for her children, all under age nine, during summer vacation. So she brought them into her office two or three days per week, where they performed tasks like shredding waste, mailing things, answering phones, greeting clients, and copying documents.
Fisher deducted $28,770 in wages she paid the kids over a three-year period. But she never issued W2s or kept payroll files. She didn’t keep any records substantiating the work they did or establishing that it was “reasonable compensation” for the work they did. Nor could she present any documentary evidence, such as canceled checks or bank statements, to verify that she actually “paid” them the wages she deducted.
You can probably guess where the story is headed. The IRS disallowed the deductions for the children’s wages (and imposed an accuracy-related penalty) and the Tax Court affirmed that decision.
Here’s the bottom line. Hiring your kids to work for your business can be perfectly legal tax planning! But you have to follow the rules to protect the benefits. So let us answer your questions and help you do it right. Call us at xxx-xxx-xxxx!
When you click on the “Client Alerts” button in TaxCoach, you’ll see a list of alerts, with this latest on top. The file “KidPayroll.rtf” contains letters addressed to all of your clients who you’d recommend to hire their children to work in their businesses or investment real estate. (Alerts like these are just one great reason to enter all your clients into TaxCoach.) Of course you can also take the Client Alert text and enter it into your own contact manager. (If you haven’t already done so, give the TaxCoach Bulk Client Import a try.)
You can download the alert file to your computer, and print on your letterhead using MS Word, or any word processor that supports Rich Text Format (‘RTF’). You’ll find instructions on the Client Alerts page.
You’re thinking you can just get away with emailing this, right? That’s better than nothing. But it’s not nearly as effective as good old-fashioned snail mail for getting your most valuable clients’ attention and reminding them you’re looking out for them as their trusted advisor.