If you hire your kids, be the boss, not the parent ? Business ...

It?s almost summer, and some lucky kids will be working in their families? businesses. Sole proprietors and partnerships where both spouses are partners can get some special payroll tax breaks for hiring their kids.

But those businesses also start with two strikes against them, since the IRS is likely to presume that payments made to kids are nondeductible allowances, not deductible wages. Family businesses that are organized as corporations can?t reap similar tax breaks, since kids go on the corporate payroll, but the same wages-or-allowance pitfall remains.

Regardless of your business structure, following a few rules can keep the IRS out of your hair this summer.

Rule #1?Make sure it?s legit. The boss?s daughter must be treated like any other employee. She must have real job duties, file a real W-4, submit real time sheets, etc. Having the ?employee? not show up at all, or perform basic household chores while on the company payroll, won?t pass muster with the IRS. Why: The company had no intent to pay compensation.

Rule #2?Base pay on the services performed. There is no room for flexibility when it comes to paying your child. The IRS will consider it suspect if a dependent is paid a flat amount that?s determined at the beginning of the year. Don?t, for example, calculate what you can afford to pay your son even before he gets out of school for the semester.

Another no-no: calculating pay to exactly equal the year?s standard deduction. You can call it a wage advance, but the IRS will call it an allowance. In all likelihood, a court will call it an allowance, too. Pay should be in line with what other employees with comparable duties receive.

Similarly, the dates of payment should correlate with the dates services are provided. Don?t pay your daughter the bulk of her wages either before she starts work for the summer or after she leaves for school in the fall. ?Likewise, don?t pay off her credit card bills and call it a payment of wages. Again, that looks an awful lot like an allowance. She?s on the payroll, along with other em??ployees, so she should be paid with them, too.

Rule #3?Respect the payroll rules. Every child on the payroll gets a W-2 at the end of the year, like every other employee. Federal income tax withholding always applies (unless the child elects an exemption from income tax withholding), but state tax law may exempt the child from income tax withholding.

The special payroll tax benefits for sole proprietorships and spousal partnerships, which the IRS recently restored, come into play here. Whether these businesses must ?withhold and pay FICA and pay FUTA, depends on dependents? ages.

• Payments to dependents under the age of 18 are FICA and FUTA free.
• Payments to dependents under the age of 21 are FUTA free.

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