Don't Count Chores When Hiring Your Own Children

Many family child care providers take advantage of the tax benefits of hiring their own children to work for their business.

The wages paid to your own children can be deducted as a business expense. If your child is under age 18, these wages are not subject to Social Security/Medicare taxes, and your child doesn't have to report earnings on their tax return unless they make more than $12,950 (2022).

Wages paid to spouses or children, age 18 or older, are subject to Social Security taxes and must be reported as income on the person's tax return.

When hiring your own children, you can pay them to do work for your business, but you cannot pay them to do personal household chores.

What is the difference?

A U.S. Tax Court case (T.C. Summary Opinion 2006-127) has shed light on this question.

The Alexanders ran several businesses out of their home (not family child care) and hired several of their children to help them out. The IRS concluded that most of the tasks the children preformed were in the nature of routine family chores, such as cleaning, vacuuming, taking out the garbage, mowing the lawn, and helping with their parents' shopping trips."

Such chores are part of parental training and discipline rather than the services rendered by an employee for an employer," the Court said.

For wages to a child to be deductible the employer must meet certain requirements:

* Specific employment tax forms must be filed (Form 941, W-2, W-3)

* The work performed should be related to the business, not personal activities

* Wages paid should be based on the actual work performed, not a predetermined amount paid on a monthly or weekly basis

* The employer must keep accurate records of the actual hours worked

* Personal household chores are not considered wages

The IRS will closely scrutinize family child care providers who hire their own children or spouse. This is because some providers are tempted to gain a tax benefit without following the proper rules.

Providers can learn from the Alexander case while distinguishing it from their own situation.

Unlike other home-based businesses, family child care providers must clean and maintain their home to run a successful business. Some household chores could be considered "ordinary and necessary" for a family child care business and not other businesses.

For providers to be able to deduct wages paid to their own children (or spouse), they need to identify each activity spent by their employee as a business, not personal activity. For example: Cleaning the kitchen and bathroom could be a business or personal activity. To count these as business hours, providers need to show that their child cleaned these areas more often than they would have been cleaned if there was no business. This means providers should keep track of the times spent cleaning these areas for personal reasons.

Let's say a child spent a half hour cleaning the kitchen and bathroom in the morning before the children arrived or in the evening after the children left. A provider could count this half hour as business work if she also kept records showing that someone cleaned these areas during some other time during the week.

It's not enough for a provider to try to deduct the wages paid to their own child who mows the lawn by saying that she must maintain an outside play area for the children in her care.

Unless you can show that you are mowing the lawn more times because you are in business, it is not a good practice to count these hours as a business activity. The same reasoning should be applied to washing windows, taking out the garbage, etc. Such activities are primarily personal, even though a provider can argue that she must maintain a clean home for her business.

It's only the extra time above what would normally be done as a homeowner that can count as a business activity. If you aren't keeping careful track of how often you are cleaning areas for both personal and business reasons, it is a good idea not try to deduct the wages paid to your own children when they do the cleaning.

Tom Copeland - www.tomcopelandblog.com

Image credit: https://www.angelibebe.com/blog/2015/07/to-pay-your-kids-for-chores-or-not/

For more information about hiring your own children, see my Family Child Care Tax Workbook.