pg #159 of Toms Tax Workbook
 

On pg #159, it states that its unreasonable to pay your child $6,000 if business profit is $15,000. I don't see anywhere in Tom Copeland's audit archives where this has been an issue. Has anyone been audited and the IRS has disallowed wages based on profit? Based on what can they disallow if a provider did pay for wages that were at a reasonable rate of pay and filed all the required forms with proper records and can be verified by the customers?

hiring own child
 

Originally Posted by Daycarefamily:
On pg #159, it states that its unreasonable to pay your child $6,000 if business profit is $15,000. I don't see anywhere in Tom Copeland's audit archives where this has been an issue. Has anyone been audited and the IRS has disallowed wages based on profit? Based on what can they disallow if a provider did pay for wages that were at a reasonable rate of pay and filed all the required forms with proper records and can be verified by the customers?

Providers can deduct all "ordinary and necessary" expenses for their business. My point is that there is a line which you shouldn't cross in paying your own children. That line is one of reasonableness. Is it reasonable for someone making a $15,000 profit to pay out $6,000 of that to an employee, particularly if that employee is your child? I don't think so. And I think the IRS would agree with me. The IRS does look closely at the amounts you pay your own children. Having the proper paperwork is one thing. Paying more to your child than you would pay to someone not related to you is another. I'm just saying you shouldn't go overboard. What is a "reasonable" pay? Something you would pay a non family member.

Thank you for the insight.