How to Hire Your Own Children Under Age 18
There are advantages to hiring your own children under age 18 to help you with your family child care business. But, there are also pitfalls you want to avoid so you won't run into trouble with the IRS.
First, the advantages:* Your children can reduce your workload by helping you care for the day care children, cleaning up after the children, cooking, or doing a variety of other tasks.* You can pay your children and deduct their wages as a business expense. And depending on the amount you pay, the child may not owe any taxes on what they earn. This can result is a big tax savings for your family.
Next, the pitfalls: The IRS is naturally suspicious of family child care providers who hire their own children for their business. They assume that some child care providers are not following the rules when hiring their own children and thus are not entitled to the tax benefits.
Non-Tax Rules If you want to be able to deduct the amounts you pay your own children, you need to keep proper paperwork to show that the money you paid your child was for work and was not an allowance. This means:
Prepare a job description that details the responsibilities of the job: play with the children, clean up before and after the children, prepare meals for the children, clean toys, record keeping, etc. Do not include more personal activities such as shopping, mowing the lawn, running family errands, etc. Don't count any work for any activity that would still be done if you weren't in business.
Prepare a written agreement between you and your family member that describes the employment arrangement: days and hours of work, pay, etc. Both parties should sign this agreement.
Keep a daily record of when the work was done. If the work done is the same every day, simply record the days and hours worked: Monday 9am - 10am, Tuesday 9am - 10am, Wednesday 9am - 10am, etc.
Write out a receipt for each payment, get the family member to sign it, and keep a copy: "Payment of $25 cash for 5 hours of work January 3 - 7, 20__." It is not necessary to pay by check; you can pay with cash. Make this payment out of a separate business account if you have one. You could also compensate your child by buying them clothing, movie tickets or other items.
Payments to family members must be reasonable. If you have a $15,000 business profit, it is unreasonable to pay your own children $6,000 in wages. Payment of $20 per hour to your 15-year-old is also unreasonable. The test of what is reasonable is probably how much you would be willing to pay someone who is not a family member. If you also give your child an allowance, keep a record of when you gave this allowance and how much it was. The federal minimum wage is $7.25 per hour. Although you are not required to pay this amount, it should be considered a reasonable wage for any child.
Federal child labor laws make it illegal to hire anyone to work for you if they are under age 14. This law doesn't apply when hiring your own children. But, check to see if your state child labor laws apply to hiring your own children.
Tax Rules
Get a taxpayer identification number (EIN) from the IRS (Form SS-4 can be filled out online at www.irs.gov).
You don't have to withhold any federal or state income taxes.
If your child is under age 18, you do not have to withhold or pay Social Security/Medicare taxes.
You don't have to pay any federal unemployment taxes. Check with your state to see if you must pay state unemployment taxes.
If your child earns less than $12,550 (2021 amount) from all jobs they have inside or outside the home, he/she does not have to file a tax return or pay any federal income taxes.
File IRS Form W-2 and W-3 at the end of the year to report what you paid your child. You don't pay any taxes when filing these forms. Failure to file these forms shouldn't impact your ability to deduct the wages you paid as a business expense. But filing the forms does help show the IRS that you have an employee.
Update: Some child care providers and tax preparers file the quarterly IRS Form 941 (or the annual 944) as another way of showing that they are treating their own child as an employee. These forms are normally filed to pay Social Security/Medicare taxes. When you hire your own children under age 18, you won't owe these taxes and therefore it's not required that you file these forms. I've had some providers tell me that when they filed these forms the IRS assumed they owed money and wrote letters requesting they pay. After some correspondence, the IRS backed off. I've heard from others that they never had this problem. To be on the safe side, you may want to file these forms.
You don't have to pay your child the federal minimum wage of $7.25 per hour. Check with your state (Department of Labor) to see if you must pay any state minimum wage.
Check with your state to see if you must purchase workers' compensation insurance.
Conclusion
Many child care providers have their own children work for them, but don't pay them anything. It's okay not to pay your children! You can reward your children by giving them gifts or their help can be considered an expected household chore. If you do this, the gifts are not a business expense.
If you want to be able to deduct the amounts you pay your children, you must follow the rules cited above. Although the paperwork can be intimidating, the tax benefits are real.
Here's my article on hiring your spouse or your own children who are age 18 or older.
Thanks to Alison Jacks and Kelly Nokleby.
Tom Copeland - www.tomcopelandblog.com
Image credit: https://raisingchildren.net.au/grown-ups/work-child-care/planning-starting-child-care/care-planning-settling
For more information on hiring your own children, see my book Family Child Care Tax Workbook and Organizer.
