Income shifting to kids

16 Replies

Originally posted by @Justin Denham :
I asked my CPA about shifting $6,300 to each of my kids on my tax return for the work they did in my business. He told me I would have to 1099 them. Is that correct?

 Quite possibly which means self employment taxes. The other thing you can look at is there needs to be actual checks. I know that office very well in Tampa and the agents would eat it alive if there was not a flow of cash to match. 

 It must be actually paid out.

@Justin Denham
They have had to actually perform work for the business but yes you can pay them. But I would be careful as this is a flag for auditing and if you are and they ask your kid what they did etc and they didn’t work do you want your kid to lie for you ?

I had a similar question. Can one purchase a rental property with a child (4 year old) and use some of the earned income to fund a kid Roth IRA?

@Jay Catena

Rental properties do not create earned income and cannot fund IRAs - neither kids nor adults.

Love your thinking though - start early.

@Justin Denham @Jay Catena

Not sure if new tax laws changed things but this worked in the past. Pay the kids from your personal household funds for work at home- cutting grass, shoveling snow, washing cars, windows, etc. then no self employment tax is necessary under approx $7500. You should file a tax return for them and use the money to fund a Roth IRA.

If you pay from business then 1099 and SE taxes apply. 

Maybe @Michael Plaks  can weigh in. 

You can also just pay them as employees if you have that type of insurance (including workmens comp). I would only do that if you do it real time and it is something you set up an employee pay service for. They have to actually be reasonably able to do the work based on age, hours should be plausable in number, wages usual and customary for the job.

They are 14, 15, and 20. I paid them cash. I was basing everything off of the Amanda Han podcasts. She said they could be paid cash or it could be paid for things that are not expected to be paid for (food, housing, clothing,etc). They searched social media and Craigslist for Homes for sale, hand wrote letters weekly for me, and did driving for dollars.

Originally posted by @Justin Denham :
I asked my CPA about shifting $6,300 to each of my kids on my tax return for the work they did in my business. He told me I would have to 1099 them. Is that correct?

Yes he is correct, if you pay an individual for services, in the course of your business, you are required to issue them a 1099.  The amount listed sure sounds like you are trying to evade taxes.....  

You also mention you paid them in cash - you have no way to support this then, under audit you would be screwed and this would also make the auditor question anything else you have going on.  

Last, your kids will also be required to file tax returns and would likely owe some SE tax.

If you want to do this legit it can work but it doesn't sound like you are there.

Originally posted by @Justin Denham :

They are 14, 15, and 20. I paid them cash. I was basing everything off of the Amanda Han podcasts. She said they could be paid cash or it could be paid for things that are not expected to be paid for (food, housing, clothing,etc). They searched social media and Craigslist for Homes for sale, hand wrote letters weekly for me, and did driving for dollars.

So your 14 and 15 year old children were paid to drive around and look for houses for you?!?!?!?!  And they are relied upon for the marketing side of your business?

@John Woodrich , feel free to read the whole statement.  I have a 20 year old college student.  And yes, they help me scour social media for leads.  While your children may not be competent enough to do that, mine are more than intelligent to do so.  As far as paying in cash, I was relying on information on the Bigger Pockets podcast from a CPA who has been interviewed on the show 4 times and literally wrote their book on taxes and real estate, so forgive me for accepting that as a reliable source.

Originally posted by @Justin Denham :

@John Woodrich, feel free to read the whole statement.  I have a 20 year old college student.  And yes, they help me scour social media for leads.  While your children may not be competent enough to do that, mine are more than intelligent to do so.  As far as paying in cash, I was relying on information on the Bigger Pockets podcast from a CPA who has been interviewed on the show 4 times and literally wrote their book on taxes and real estate, so forgive me for accepting that as a reliable source.

I don't care who said what, there are times where something may be OK in one scenario and not in another.  If you trust your CPA and they recommended this I don't see why you feel the need to come to an online forum to seek additional advice.  If you don't trust your CPA you should find another.

Anyone who says you will be OK under audit claiming an unverifiable cash payment as an expense to someone who is likely a dependent on your tax return is lying to you.  You can claim deductions to payments to your children but for obvious reasons there is a little more scrutiny on these payments due to tax evasion transactions.  

If you want to get it correct going forward you should have them document hours and what they did.  They will likely be acting under your discretion so they would likely be classified as an employee, you will have to file payroll returns, pay payroll tax, and write them a check.  You can't however put their check towards taking them out to Applebees once every week, it becomes their money.

Congrats on having the most competent kids in the world.  Hope they aren't missing out on the joys of being a kid.

My initial response when I read "Shifting $6,300 to each of my kids" was income tax evasion. That may not be your intent :) but I would guess you are asking to be audited. Based on the info you have provided if audited it will not go your way.

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