Hiring Children

Need to know from my expert colleagues on this board if my understanding on this is correct.
I have a tax client who operates as a sole proprietorship (real estate agent.) Earlier this year (in the middle of tax season) I shared with her the general tax-saving strategy of shifting income to her two teenage children by hiring them in her business. Now I find she's been paying them $500 monthly, putting it into a custodial account (and ultimately paying private school expenses)... but she's not been paying them as W-2 employees, which means she's not filing state/federal taxes.
Now here's my question:
If we DO report these as wages, she doesn't have to collect Soc sec and Medicare from her children, since she is a sole proprietor. Correct?
But if we DON'T report these payments as wages, won't she have to file 1099s, and consequently the children will have to report the payments as self employment income (subject to FICA), even though each of the children's total income is below the new standard deduction of $12,000?

They need to be paid as W-2 employees.

Also at this level of compensation, taxpayer should look into Roth accounts for each child.

Basis is correct of course, but that said....when the sole prop has had no other employees, I'm fine with them not opening up filing all the payroll forms. Look, the kids are subject to state or Fed unemployment, or SS taxes. So I've issued 1099's, and on the kids' returns put it on line 21 with a notation that they're kids of sole prop, not subject to SS/SE. Never got mail...not that that's evidence of much.

JR, I continually admire your "out of the box" ways of handling these kind of situations.

LOL.
Others may not!

the general tax-saving strategy of shifting income to her two teenage children by hiring them in her business.

I like the way there isn't even a pretense of hiring someone to do an actual job at a fair wage -- just "income shifting".

Now let's see, for a teenager to earn $12K, for example, they'd have to work 40 hours a week for all ten weeks of summer vacation without taking a single hour off, at $15 minimum wage, and they'd still only be at $6K. And how many teenagers can really perform work worth even that level of minimum wage?

So what we'll start seeing, is businesses that previously had no employees, now suddenly have the proprietor's teenage (or younger) kids getting W-2s with $12K of income each, no withholding, nor will the business be showing any payroll tax expense or worker's comp expense. What is our due diligence?

LOL.
Others may not!

Maybe we should start a new thread in the "Tax Prep: Important tips and advice" sub-forum: Helpful ways to prepare a tax return incorrectly that you can usually get away with. We can start with not reporting kiddie tax, "hiring" kids as employees (really just shifting income) and then not even bothering to file W-2s for them, and so on.

fuzzy math, I get $5k each.

Let's just find out first if the kids are actually working for her.

Maybe we should start a new thread in the "Tax Prep: Important tips and advice" sub-forum: Helpful ways to prepare a tax return incorrectly that you can usually get away with. We can start with not reporting kiddie tax, "hiring" kids as employees (really just shifting income) and then not even bothering to file W-2s for them, and so on.

I bet that book would be a best seller

Your approach will not work if audited or questioned . If you issue 1099's you might be lucky and get away with it but now they are independent contractors and not employees. IMHO it is not worth the risk .

Do it the proper way and treat as employees . You have a payroll service so why not give them a break on your fee .

You mention 2 teenagers . If under age 18 they are exempt from FICA and medicare withholding (employer and employee )

Just as big an issue is the amount to pay the kids and documentation and support for the work done. IRS has torpid-owed in tax court many instances of excessive pay and lack of documentation of hours worked .

I think this best seller book idea deserves its own thread.

Entry 1:

Each child of a sole proprietor is allowed a $5,000 modeling contract, evidence of which is a single iPhone photograph posted to the sole proprietor's business Facebook page.

I think it would be easy to justify a salary of $6,000 per kiddo, but I agree with Makbo, there should be some sort of time tracking, duty assigning, task notations, job role assignment, gender re-assigmnent (oops, wrong forum).

You can’t be willy nilly, there ought to be a job description, a chart itemizing the duties each kiddo perfoms, time tracking, to “look as if” these kiddos are bona dude employees. There’s a tax court case of a Dad hiring his 7, 9, and 11 year old kiddos; I might have those ages incorrect. All considered bona fide employees.

Also, with the push for massive hikes in the minimum wage (not in Texas, by golly), even a $12,000 salary may not seem far fetched these days. That’s less than 1,000 hours a year worked for a $15/hour minimum wager. Not hard to do when in school. Heck, I worked 35+ hours a week whilst in my junior and senior years in high school. I might have had to work until 2am on the weekends (think large retailer) but I pulled it off quite easily some weeks. 3-10pm each weekday equals 7 hours X 5 days a week = 35 hours. And, I’d often get overtime. “Lunch? Nah, lunch is for wimps!”

Tell an Antifa millenial they have to work 35 hours a week these days and they will wonder when their 7 weeks of vacation kicks in!!!

I agree with EADave. Document what the Kids are actually doing. Also take pictures of the kids working at their jobs.

the push for massive hikes in the minimum wage (not in Texas, by golly)

Not surprisingly, more fake news. Only one outlier out of over a hundred cases might be considered "massive". If you have increased your tax preparation fees by 10% cumulative over a number of years, do you consider that "massive"?

"[...]the sluggish pace of the federal minimum wage is what has prompted many states and localities to institute increases on their own"

"Seattle's minimum-wage increase, Vigdor says, was a lot steeper than most other increases have been. Minimum wages at large businesses and franchises rose by $3.53, or more than 37 percent, over just nine months. Out of the 137 minimum-wage increases included in the Dube et al. paper, by contrast, that average increase was 10 percent."

"At the federal level, the minimum wage hasn't been raised since 2009, when it was set to $7.25. In inflation-adjusted terms, the federal minimum wage was highest in 1968, when it was equal to $11.18 in today's dollars." The U.S. has one of the stingiest minimum wage policies of any wealthy nation

"On average, minimum-wage increases eliminated jobs paying below the new minimum, but added jobs paying at or above the new minimum. The two changes effectively cancel each other out." The effects of 137 minimum wage hikes, in one chart

A push for massive hikes in the MW doesn't mean those movements were successful. There is still a large number of people that not only want $15/hr MW, but want guaranteed income for all working age people.
Countries who implemented this idea a few years back are now trying to figure out how to get out of it. How people can be both horribly ignorant of economics and in charge of that policy is a mystery to me.

I always thought the good Capt was from CA....when we visit our daughter up north of Seattle, we are truly shocked at how expensive everything is. Groceries!, gas, meals out....fairly fundamental things that all income categories buy! I wonder how low income folks afford it. Which may explain the hundreds (thousands?) of tents up and down I-5 in the Seattle area. It's not helping them.

You didn't mention if the children were actually doing work let alone $1,000 worth per month between them. You did confess that you are not treating their wages as wages nor giving giving them their paychecks like employers are supposed to do. I would not like to have to explain this to an IRS auditor. Please tell us what the client is really doing here.

Makbo, if I am operating a large retail store, think big blue letters, and I have 200 full time people on staff earning minimum wage of $7.50 an hour, and you tell me the new minimum wage has doubled to $15 an hour; yeah, I consider that a massive increase. You've just increased that retailer's one store wage expense by $60,000 per week!!! Add in payroll taxes, benefits, worker's comp, insurance, etc, yeah, that is massive.

But maybe I went to far with $15 an hour. Even if you have a small business owner with 10 full timers on staff earning minimum wage, then you tell him, "Hey pal, instead of $7.50 an hour, you now must pay your rank and file $11 an hour (California minimum)." You have yourself a massive increase my friend. His wage expense has just increased by $1,500 (including payroll taxes) a week. Can your business afford an additional $78,000 annual increase in expenses due to a communist State Government decision? If so, I'd like to ride in your private jet when you come to TX. The business owner would be forced to layoff half of his staff to keep his payroll costs the same as prior to the hike. How does that help the rank and file? I'm not saying folks shouldn't be paid for their share of work, but if I have to pay a snot-nosed kid to run a register $11 an hour (a wage I didn't earn until I graduated high school), I'm buying a robot instead. No feelings, no breaks, no snot, no nonsense. The minimum wage is set at a low rate because it isn't meant to sustain life, raise a family, etc. It is meant as a bar, the lowest bar you can achieve. And, if you would like to raise your own personal bar and earn more, then you acquire new skills, you take courses, attend college, so one day you can look back and say, "Man, I can't believe I only earned $7.50 an hour when I was a kid...." You don't say, "I deserve more pay because I'm unique and I work hard." The point is, we don't need the Gubmint to step in and tell us how to operate our business, when it comes to the minimum wage. Let the free market decide what wages are proper, and if a kid doesn't want to earn so little, go get a job elsewhere paying a higher wage; simple.

And, I don't listen to the news, I just read the funnies. You live longer by not taking politics too seriously. Also, the only fake news is the news you see on TV....all of it!

minimum wage of $7.50 an hour, and you tell me the new minimum wage has doubled to $15 an hour; yeah, I consider that a massive increase.

You totally missed the point of my post #13.

Nah, truth be told, you can’t rely on Wapo for anything but a slanted, dare I say Socialist, view of the world, so I skipped the extra reading. Maybe I’ll read the Cliff Notes, nah I won’t even do that, I can’t even lie!

I don’t believe the Government (State or Federal) should have the right to enforce a higher wage minimum with no offset. Artificially increasing cost of operating a business with no real benefit to the business only hurts the consumer and the Employee, would you agree?

The business would be forced to raise prices and/or cut employee hours. I don’t want to pay $8 for a gallon of milk (I don’t drink milk anyway). I think the minimum wage should be $0.00. No one would work for free, so the free market would force employers to pay at least some sort of consideration or they would have no workers. The free market will sort it out and besides, people seeking a better life, career, family life, don’t care what the minimum wage is because they acquire new skills to take them beyond the entry level job.

One store pays $5 and hour, the other pays $11 an hour. One store attracts more customers with lower prices (due to lower costs to do business) and the other business has zero employees walking around (think Lowe’s and Home Depot) and the registers are robots because the store can’t afford to pay idiots to walk around and say, “I don’t know, I think Bob used to be a plumber but he quit because they cut his hours.” I realize it’s not this basic, but you get the gist.

Nah, truth be told, you can’t rely on Wapo for anything but a slanted, dare I say Socialist, view of the world

I guess it's your reliable "alternate" news sources, then, (which you don't cite) that have informed you that someone, somewhere, has even proposed doubling the existing minimum wage for a given jurisdiction in one step, let alone actually enacting such a thing.