Have you considered hiring your child or children as a W-2 employee? If you haven’t, you may want to think about it. The Hire Your Child strategy works best if you have a Schedule C proprietorship. If you hire your under-18 child, both the proprietorship and child are exempt from payroll taxes.
However, if you operate as a corporation, or if your child is over 18, you’re both required to pay payroll taxes. This strategy provides a way to avoid paying payroll taxes.
The Tax Code and Self-Employment Net Earnings
The Tax Code states that the term “net earnings from self-employment” means gross income earned by a person by providing services for another individual or a business on a regular basis. According to the Supreme court, sporadic business activity doesn’t qualify as self-employed.
How does the Hire Your Child Strategy work?
Just hiring your child to perform a single one-time task doesn’t mean your child is in a trade or business. Hiring them for a one-time task doesn’t make them your employee, either. So if you pay them to build your company’s website, install software, paint your office, or create a few business-related videos, it doesn’t mean they are self-employed or your employee. That makes it a for-profit endeavor, not a trade or business. If you do that, just make sure you don’t make them an employee.
Since your child is not operating a trade or business, and just providing a for-profit endeavor, your child doesn’t incur expenses. Any expenses are subject to the 2% adjusted gross income floor. So, if you need to have windows installed, your business should purchase windows as well as the installation instructions. If you don’t do this step right, your child can deduct the program and installation materials as a cost. This not only creates a lot more paperwork, but it also doesn’t sit well with the IRS.
The Batok court Case
John Batok installed windows for a business. The court ruled that it wasn’t a trade or business venture even though he did the job for profit. But, he never installed Windows before the instance, nor did he install it after. Therefore, the court deemed it as a one-time job that wasn’t subject to self-employment taxes.
Member of Congress Public Speaking Income
According to the Rev. Rul. 77-356, a Member of Congress may receive some income for speaking engagements. However, this income isn’t from performing duties as a Member. It’s a separate trade or business, speech making. It’s separate from congressional duties, so it may or may not be the same as running a business. The IRS states that according to Rev. Rul. 55-431, individuals who accept occasional speaking engagements for which they receive money, are not engaging in a business or trade subject to self-employment tax.
However, the IRS also ruled that a Member of Congress who gave numerous speeches and accepted honorariums was liable for self-employment taxes. Accepting regular speaking engagements did rise to the level of a trade or business.
The problem is the “gray area” between occasional work and regular work that distinguishes work as a trade or not. When hiring your child, you’ll want to consider one-time activities to avoid paying self-employment tax. Being able to avoid putting your child on payroll by paying for one-time projects offers you the best of both worlds.
