June 2019
In This Issue

We are grateful to have the opportunity to provide you with this valuable information via our monthly e-newsletter and our unparalleled forensic accounting and fraud investigative services.

The goal of this e-newsletter is to provide you critical, inside information that will help you "follow the money" in business disputes, divorce cases, fraud cases, estate matters, corporate embezzlement and to prevail when defending an IRS criminal case. We will do this by sharing the knowledge we have from our 25+ years of experience as an IRS Special Agent and 16 years as a private investigator / forensic accountant.

We take special care to ensure the information we provide you in "The Beacon" is the latest and most current information available.  In this edition, we talk about hiring your child as an employee.

We want to write about topics that will assist you in prevailing with fraud, divorce, estate and probate, and IRS criminal cases. Please e-mail us your topics of interest to Thebeacon@sageinvestigations.com
We encourage you to share our e-newsletter with others in your sphere of influence.  
Edmond J. Martin
Principal, Chief Investigator
Certified Fraud Examiner (CFE)
Texas Certified Investigator (TCI)
Hiring Your Child as an Employee 

Thanks to the Tax Cuts and Jobs Act (TCJA), if you are operating a small business as a sole proprietorship or a single-member LLC that is treated as a sole proprietorship for tax purposes, you can hire your child under the age of 18, as a legitimate employee. His or her wages will be exempt from Social Security tax, Medicare tax, and federal unemployment (FUTA) tax. In fact, their wages are exempt from FUTA tax until they reach the age of 21. You can hire your child part-time or full-time. (Publication 929, Tax Rules for Children and Dependents)

Under the TCJA, your child employee can use his or her standard deduction to offset up to $12,000 of 2018 wages paid by your business from their federal income tax. For 2017, the standard deduction was only $6,350, but the TCJA nearly doubled it because of the increase in the standard deduction. Therefore, under the new law, hiring your child is a good idea. In addition, you can claim them as a dependent on your return.
For 2018, your child will owe nothing to the IRS on the first $12,000 of wages, unless the child has income from other sources. Your child can then set aside some or all of the wages and contribute money to a Roth IRA or a college fund.

When hiring your child, you need to be careful to treat them like any other employee. This includes items such as:
  • Maintaining detailed employment records including: Job description, Forms W-4, Form I-9, hourly time and attendance tracking, and a description of work performed.
  • Your child is required to receive a Form W-2 for work performed.
  • Ensuring the services provided do not include typical household chores.
  • The wage calculation should correspond for similar services provided by an arms-length employer.
  • Issuing paychecks as you would a normal employee (e.g., weekly, bi-weekly, etc.)
  • Documenting that the services are legitimate and considered ordinary and necessary for the business. 
In the 2014 Tax Court Decision Patricia D. Ross v. Commissioner, TC Summary Opinion 2014-68, the decision stated if your child is not treated like other employees in a similar position, the IRS could deem the wages as not ordinary and necessary business expenses and disallow them as a deductible expense.
Case Study:
Mrs. Ross operated several businesses and hired her three children to perform services. The work performed by the children was mostly legitimate work and timesheets were prepared. Mrs. Ross filed the appropriate employment tax returns and the children's income tax returns where required. While the above items were a good start, Mrs. Ross did not generally pay her children on a regular basis, but rather she often made payments to third parties for expenditures that her children "directed her to make" (most of which were meals at restaurants). Also, amounts "paid" to the children had no correlation to the number of hours actually worked and there was no consistent wage rate (hourly rates ranged from $4-$30 per hour depending on the child and year). Based on all the facts and circumstances, the IRS determined that the arrangement between Mrs. Ross and her children was too dissimilar between that of a normal employer/employee relationship, and that all of the wages claimed as an expense were disallowed.
Caution: Section 162 generally allows ...  Read More  

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