Wages Paid to Children

When self employed taxpayers hire their own children the wages must be reasonable for the work performed and records must be maintained to support the payment and reasonableness of the payment.

Mr. Dumond was a sole proprietor in Des Moines, Iowa, operating a vending machine business. He claimed a deduction of $4,800 to each of his minor children (ages 5 and 10) for their services. Apparently he paid his children “what the law allowed” so they wouldn’t have to report the income. A set amount was paid each year rather than an hourly wage.

He stated that the children rode only on weekly routes, put candy bards in the machines, sorted the candy, broke down the cardboard and sorted recyclable products. The older child counted the money. He said they worked approximately 10 hours per week, but he didn’t know for sure how often they worked and he didn’t keep a record of their hours.

His proof of payment were checks made out in December. The checks were not cashed for at least 2 months because there wasn’t enough cash to cover the checks. The children did not have separate bank accounts and he put the money into his personal or business account.

Tax Court says he never gave up control of the money, therefore the reasonableness of the amounts paid did not have to be considered. He was unable to establish the work the children performed, the hours they worked, and their control over the money. Therefore, the deduction was denied.

Jeffrey and Cynthia Dumond, TC Summary Opinion 2005-11

Lessons from this case:

The IRS will look closely at providers who hire their own children. Careful records should be kept, including days and hours the work was performed, record of payment throughout the year, record that the child actually received the payment, and the pay must be reasonable. This taxpayer failed on all accounts.

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