There are definitely tax benefits to hiring your own children (or spouse), however, the IRS will scrutinize family child care providers who do.
Why? Because providers “may be tempted to gain a tax benefit without following the proper rules”.¹ Rules? What Rules?
For family child care professionals to be able to deduct wages paid to their children (or spouse) doing “chores” – they must be able to distinguish the time the child/spouse spent doing chores or activities between personal or business. That means if your child/spouse is cleaning the kitchen, bathroom, vacuuming, taking out the garbage and so on, you will have to be able to show how these activities are exclusive to the business².
For example, one such chore is “mowing the lawn”. Can you show that you are mowing the lawn more times because you are in business? If you can’t – then it is best not to count these as a business activity. If your child/spouse is cleaning the bathroom before/after the presence of children, to count the time, you will need to show that these areas had to be cleaned more often, than if there was no business.
In a US Tax Court case, a family hired several of their children to work in the home businesses. The IRS determined that the chores (or tasks) the children performed were not out of the ordinary for routine family chores, such as cleaning, vacuuming, dusting, taking out the garbage, mowing the lawn, etc.
“Such chores are part of parental training and discipline rather than the services rendered by an employee for an employer,” the Court said, so for a child care provider to deduct wages paid to a child, it must meet a set of criteria:
- 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 pre-determined 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
For additional tools to help you track this time, visit our post “Track Your Hours – Even When Children Aren’t Present” and download our Before and After Hours Table and Time-Space Percentage crib sheet.
Remember – It is only the extra time – above and beyond what you would normally do as part of routine housekeeping & maintenance – that should be counted as a business activity.
If you have questions, call us (619) 589-8680.