Daycare Tax Tips

Provider's teenage children work in her business

Must she put them on payroll?

A family child care provider writes:

> I have two daughters (ages 14 and 16) who help me sometimes. What do I have to do to pay them some money and what forms do I need to fill up? Also how much will it cost me?

Since the only helpers you have are your daughters who work for you part-time, you have choice. One option is to treat them as employees, which means paying them an hourly wage, submitting federal and state payroll tax returns, and giving them each a Form W-2 at the end of the year. Because your daughters are both under 18, however, I don't expect you to owe any actual payroll taxes. No taxes will be withheld from your daughter's paychecks, either, unless they are paid enough to trigger some income tax withholding.

Alternatively, you can decide NOT to hire your daughters and help them out with occasional gifts, instead. This approach is explained in an article from Tom Copeland's Taking Care of Business blog.

Here is part of what Tom has to say:

A Better Way

Rather than hire your relative, tell them that you won't pay them for the work they do for you. Instead, give them a gift of cash or clothing as a loving daughter, sibling, or mother. You aren't paying them for their work. You are giving them a gift. When you do this you can't deduct the gift as a business expense and the relative doesn't have to report the gift as taxable income. You aren't breaking any IRS rules if you do this. It's all on the up and up. I've spoken directly with an IRS officer about this and she reassures me that the IRS would not try to turn this into an employer-employee situation.

The only time I would suggest you consider hiring a relative is if this person is working for you on a full-time basis or on a regular part-time basis throughout the year. Unless this person doesn't mind working for no pay and receiving occasional gifts from you, I think the longer hours makes it more likely you should treat this as a business relationship.

If you decide to go ahead and hire your daughters, they will get some real experience earning a wage and you will get to deduct everything as a business expense. The only cost* besides their wages would be payroll service fees, unless you prepare and file the payroll tax returns yourself. (See my Payroll Tax Guide for further information.)

*My guess is that you are not required to get workers' compensation insurance when hiring your underage children, but you'd need to check on this.

Last updated 28 August 2011

Posted on 2011-08-29 05:41:52