Play Meter

Tax Clinic
Salary of relatives deductible
QUESTION: What are the tax effects
of placing children on the payroll?
ANSWER: Payments to children and
relatives in general are deductible as
compensation only for services actu-
ally rendered , either in connection
with a trade or business , or in the
production
and
generation
of
income
These transactions involve related
parties. and are generally not
considered to be made at arm 's
length . The Internal Revenue Service
and the courts will closely scrutinize
these payments to ensure that they
are made in connection with actual
services rendered , and that the
remuneration is rasonable in relation
to the services . Due to the nature of
these transactions , documentary evi -
dence o f the amounts paid should be
carefully maintained to satisfy the
strict scrutiny that these relationships
are subjected to .
In determining whether these
payments are for services actually
rendered, the courts examine the
circumstances to decide whether a
bona fid e emp loym ent relationship
existed. or whether the payments are
being made strictly for family pur-
poses . The Internal Revenue Service
also scrutinizes the situation where
payment for services rendered to a
child are deposited in Joint Bank
Accounts between the parent and
child to determine if the payments
actually benefitted the child / employ-
ee . The amount of the compensation
paid to the child also must be
reasonable in relation to the work
performed since unreasonable com -
pensation will be disallowed as a
deduction to the employer .
Reasonable wages paid by a
parent to an unemancipated minor
child , under 21 years of age. made
for personal services rendered as a
bona fide employee. are deductible
by the parent. as an expense . The
income of that child is included in his
or her own gross income, and not in
the gross income of the parent.
Payments made to the child for
services normally expected to be
rendered by them as household
members . such as cleaning. mowing
the lawn. etc . . are personal ex -
non -deductible
by
the
penses.
parent.
In the event you are a sole
proprietorship. employment of your
child will benefit both of you since
wages paid to your child who is
under 21 years of age are not subject
to social security tax or federal
unemployment tax. As a result of
the higher costs of social security
taxes.
this exemption
provides
substantial savings to both you and
your child .
The Internal Revenue Code
clearly allows and encourages the
employment of children. providing a
bona fide employment relationship
exists, and wages paid are reason -
able in light of the services actually
performed.
Bob Salmons and Russ MacDonald. Atari technical advisors. travelled
throughout the United States and Europe during January and February
conducting service seminars. Topics covered included basic electronics .
troubleshooting techniques. microprocessor technology. "how to read
schematics." test equipment. power supplies. and Basic IC.