Putting Children On Payroll In Rental Business

I have heard that a tax saving idea is to put children on payroll in a rental business and pay them up to an amount where they will not owe any income tax. In return, they can perform record keeping tasks, help clean vacant rentals, etc. I have heard differing views on the following so I would like you to comment please. If I do this in my rental business, do I have to pay just income taxes, filing W-2s, for Federal and State or do I have to pay income taxes plus all the payroll taxes as well, such as FICA, Medicare, SDI, FUTA, etc. If I do have to pay all the payroll taxes, I believe I would have to do quarterly filing and make Federal deposits, etc. Thank you in advance for your responses.

Reply to
Vijay Sharma
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The way I've seen it done is to create trusts for your kids (depending on the amount of money involved, sometimes you can get away with more than one trust per child to keep each trust's income in as low a bracket as possible).

Then either give the trusts an interest in your business so they become partners, or give them business equipment and lease it back. In those cases you don't have to worry about withholding taxes.

-- Stu

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Reply to
Stuart Bronstein

So long as it's an unincorporated business, you will not be required to pay any of what you list above. In 2011 a child can have up to $5800 in earned income with no tax due.

A blog article titled "Kids and Money: Paying Your Child Wages for Working in Your Home Business" linked from

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into some good detail on all this. It's pretty simple until and unless there's an audit, in which case you want to have kept contemporaneous notes on all hours worked and all tasks performed. You want to keep the hourly wage to something that passes a common sense test. Near whatever wage such a task would go for in your area.

Reply to
JoeTaxpayer

It's possible that your children don't owe any FICA tax (either their half of your half). I a website I read

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Employment Exempt From Social Security and Medicare Taxes

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work performed by a child under age 18 for his or her parents (age 21 if the work is outside the course of the employer's trade or business or is domestic service)

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But I want an official link from an irs tax topic, publication, etc. After some looking I found IRC 3121

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(b) Employment For purposes of this chapter, the term ?employment? means any service, of whatever nature, performed

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(C) if it is service, regardless of where or by whom performed, which is designated as employment or recognized as equivalent to employment under an agreement entered into under section 233 of the Social Security Act; except that such term shall not include?

(A) service performed by a child under the age of 18 in the employ of his father or mother;

(B) service not in the course of the employer?s trade or business, or domestic service in a private home of the employer, performed by an individual under the age of 21 in the employ of his father or mother, or performed by an individual in the employ of his spouse or son or daughter; except that the provisions of this subparagraph shall not be applicable to such domestic service performed by an individual in the employ of his son or daughter if?

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If all your children's income is employment income, they don't have to pay any kiddie tax (which means basically investment income above above about $2000 is taxed at the parent's tax rate), so they could benefit by paying at a lower tax rate. As they are dependents they don't get to take the $3,650 exemption, but they will get the full standard deduction. Then they would be in the 10% tax bracket, so it would probably still save you money.

I would imagine that the money they make must go into an account that they control and that you cannot control. No trust account or account in your name for their benefit.

Your biggest worry is labor laws. California is the heart and soul of over-regulation, so they have a website

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Child labor laws

The Division of Labor Standards Enforcement's child labor law booklet contains comprehensive information about child labor laws, school attendance, wage, hour, and age requirements, restrictions, employer requirements and work permits.

For table summaries of child labor law requirements and restrictions arranged by age, and for a summary of penalties which may be imposed for violating child labor laws, click here.

The booklet also contains references and links to the state Labor Code, the Education Code and other relevant laws and regulations. Work permits

Except in limited circumstances defined in law and summarized in the child labor law booklet, all minors under 18 years of age employed in the state of California must have a permit to work.

Prior to permitting a minor to work, employers must possess a valid permit to employ and work. The permit to employ and work are issued on the same form. A permit to employ and work in industries other than entertainment is usually issued by an authorized person at the minor's school. During summer months or when school is not in session the work permit is obtained from the superintendent of the school district in which the minor resides.

Typically, after an employer agrees to hire a minor, the minor obtains from his or her school a Department of Education form entitled "Statement of Intent to Employ Minor and Request for Work Permit". The form must be completed by the minor and the employer and signed by the minor's parent or guardian and the employer. After returning the completed and signed form to the school, school officials may issue the permit to employ and work.

Permits issued during the school year expire five days after the opening of the next succeeding school year and must be renewed.

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I have no idea if you need to pay SDI, unemployment, or how much the fee costs. Really don't know much about this stuff.

Reply to
removeps-groups

I thank you all for your good comments. I assume if the kids - less than 18 years of age - earn less than $5,800 for each kid, there will be no payroll or income taxes. Would I still have to file W-2s if they earn less than $5,800 each? Same question for filing Federal and State Income taxes (Form 1040EZ, etc).

Reply to
Vijay Sharma

Yes, you need to issue W-2's, and before that, get W-4's from them claiming exemption from income tax withholding. (Pretend that these workers are strangers to you. You have no idea whether they have other income to report.) If they have no filing requirement they don't have to file returns. See the 1040 instructions for dependents' filing requirements.

Let's talk a minute about what they do with their wages. Since they will pay no income tax and are young, they would be great contributors to Roth IRAs. Some parents even match contributions through gifts, thus allowing some immediate gratification from spending while also building what could turn into a substantial nest egg 50 years from now.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

Reply to
Phil Marti

Your third sentence can be misconstrued to mean that the parent can match the child's Roth IRA contribution. I know, you just meant to say, that the parents can contribute to the child's own investment portfolio by making annual gifts exempt from gift tax.

Reply to
Alan

From

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The permissible jobs and hours of work, by age, in nonfarm work are as follows:

Minors age 18 or older are not subject to restrictions on jobs or hours Minors age 16 and 17 may perform any job not declared hazardous by the Secretary, and are not subject to restrictions on hours Minors age 14 and 15 may work outside school hours in various nonmanufacturing, non-mining, nonhazardous jobs listed by the Secretary in regulations published at 29 CFR Part 570 under the following conditions: no more than three hours on a school day, 18 hours in a school week, eight hours on a non-school day, or 40 hours in a non-school week. In addition, they may not begin work before 7 a.m. or work after 7 p.m., except from June 1 through Labor Day, when evening hours are extended until 9 p.m. The permissible work for 14 and 15 year olds is limited to those jobs in the retail, food service, and gasoline service establishments specifically listed in the Secretary?s regulations. Those enrolled in an approved Work Experience and Career Exploration Program (WECEP) may work up to 23 hours in school weeks and three hours on school days (including during school hours)

Reply to
bo peep

You're talking about the standard deduction. Does that mean the parent can't claim the child as a dependent on his tax return?

-- Stu

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Reply to
Stuart Bronstein

Two different things.

If parent is able to claim the child then the child's personal exemption (not Deduction) is zero.

The support test for qualified child is that child does not furnish most of his/her own support. Using salary to fund a Roth IRA means those wages did not go towards child's own support.

Reply to
Arthur Kamlet

Wouldn't one have to comply with the stricter of federal or state laws? For example, California's labor code at

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001-02000&file85-1312and
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001-02000&file90-1399seem to specify so many rules that maybe it is stricter than thefederal codes. I haven't read through it though. So does cleaning and book-keeping for the rentals work here? I would think yes.

Reply to
removeps-groups

Depending on your location, book-keeping might requires a CPB license or a small business license. Or it might require nothing.

Reply to
bo peep

You've gotten quite a few responses, far too many for me to pick and choose which ones I think are correct or not. So I'll chime in with my 2-cents worth.

You can hire your OWN minor children (under age 18) to work for you in your trade or business. Generally, you will not be subject to OASDI, MEDICARE or FUTA. Whether you'll be subject to State Unemployment or worker's compensation coverage will depend on your jurisdiction and the local laws & rules. Withholding, for either Federal or State income tax purposes, will be dependent on the child's income tax liability as a result of their taxable income. What child labor laws you're subject to are also a matter of local law. Maryland is pretty loose with parents who employ their minor children. To survive a Federal audit you better have a written job description and detailed work logs showing the hours worked and the rate of pay, and the rate of pay MUST be reasonable for the job at hand - you can't pay the kid $100 an hour to shred old paperwork, it just won't fly. You also need to make absolutely sure that the kid has their own bank account and you put their paycheck into their account - it is NOT your money, it NEEDS to change hands OR YOU WILL LOSE if you're ever examined.

Generally, you start with their wages, then subtract the standard deduction. There's no allowance for a personal exemption because the parents continue to claim that for all children under age 19 or under age 24 and a full time student. This gets you to taxable income. Compute the tax for both the Federal and State returns and that tells you if the kid will have a tax liability which needs to be paid. Some states like Maryland have a minimum income filing requirement and if you stay below that you don't have to worry about a tax liability.

So generally, most parents will pay the kids an amount very close to the standard deduction - $5,700 for 2010. BUT if the kid is doing something important and is old enough to justify the expense you can pay them more and manipulate the taxable amount. For example if you have a 16 year old kid who has to drive to the rental property to cut the grass and who can do some basic maintenance, like cleaning the gutters, cleaning the dryer vents, and such you could pay them $10,700 and have them put $5K into a deductible IRA. That pulls their income below the standard deduction for Federal purposes and there would be no Federal tax due. You'd have to check the rules for your state.

OR you could establish a SIMPLE IRA plan and pay the kid $15,700 and have them defer $10K into the SIMPLE IRA plan. Not only does this pull their income down to a no Federal tax situation but it lets you put another $471 (3%) into the SIMPLE for them.

But the key here is that the kid must be paid a reasonable amount for what they're doing and you must have time cards, or their equivalent, and you must put the money in the kid's account. And you WILL need to file quarterly payroll returns with the IRS - they won't know there isn't any tax due unless and until you tell them so. So even though the forms may have all ZEROS on them they still need to go in. Some jurisdictions, like Maryland, assess a penalty when a form isn't timely filed (Maryland Unemployment) even if no tax is due - so make sure the right forms are filed.

If you're in the 25% tax bracket and can pay the kid $15,700, and they defer the max into a SIMPLE IRA and you make the 3% match, you could save about $4K in Federal taxes alone. What a great way to save money and get a deduction for funding your kid's educational plan.

The reason I suggest using a deductible plan, like an IRA or SIMPLE, is because it is pretty much invisible to the college when they apply for financial aid so it won't get counted against them as an available asset, regardless of how much they've accumulated. AND if they need to take some of the money for college all they pay is the tax, probably at a much lower rate than you would have, but not the premature distribution penalty - not as long as the money is used for higher education expenses. This can be a BIG win for everyone - you save taxes now, the kid accumulates money for college or retirement, the colleges can't count it as an asset (like they will if its in a nonretirement type account) and if they need to use it for college they pay tax at a rate lower than you would have. What's not to like?

I also strongly urge you to consult with a local tax pro who is well versed in both small business and your local payroll tax laws. If you want to be safe DO NOT try this on your own.

Good luck, Gene E. Utterback, EA, RFC, ABA

Reply to
Gene E. Utterback, EA, RFC, AB

Thorough response.

But in the case of income of $10,700 and putting money into an IRA, even though no federal tax is due, you still have to file to report the deductible IRA contribution. Also, if any income was withheld on the W-2, then a return should be filed to get a refund of the money. And it might be good to file a return just to get the statute of limitations ticking.

Also, one should watch out for discrimination rules. These rules refer to highly compensated employees, but I guess they might also apply to employees who are children of the owner. To give these highly compensated employees an employer match, but not other employees, is a violation of the discrimination rules.

Reply to
removeps-groups

For earned income, the child is taxed at his own rate, correct? Why take a deduction in 10% bracket? Great time for Roth.

Reply to
JoeTaxpayer

Thank you all for the great responses.

I need to clarify something, when I started this post and wrote employing children in rental business, I meant rentals that I own and manage myself. I did NOT mean running a rental business as a professional property management company. Does that change any of your answers that you all so kindly provided? Sorry if I was not clear initially.

Thanks,

Vijay.

Reply to
Vijay Sharma

employingchildrenin rental business, I meant rentals that I own and manage myself.  I did NOT mean running a rental business as a professional property management company.  Does that change any of your answers that you all so kindly provided?  Sorry if I was not clear initially.

It does not change my answer.

Reply to
removeps-groups

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