If you pay your child to work for your business, make it legitimate by following these steps:
- Agree on a rate of pay. This should be a fair rate, what you would pay someone else in an “arm’s-length transaction”.
- Write up a written contract detailing the job responsibilities and both sign.
- Write him a paycheck monthly for simplicity.
- She should file an income tax return to document her “earned income”.
A business expenses must be “ordinary and necessary” to be a valid tax deduction. Use that definition as your yardstick when assigning responsibilities and setting pay rates.