Five Things to Know When Hiring Your Child to Work for You



By John D. Faucher, Esq.
Introduction by Gary Wartik
April 1, 2015

Vision Economics works with John Faucher, Esq., an attorney in Westlake Village, CA who specializes in bankruptcy and tax law issues.  Mr. Faucher has an active website on which he regularly posts articles of interest.  This month we are happy to publish an article about a common practice about parents hiring their children to work in the family business.  As Mr. Faurcher points out, there is a legal way to employ family members, and then there is the other way.  Do beware, for the IRS may be watching.

The story

I love having my 18-year-old daughter work in my law firm.  She’s smart and motivated.  She gets to see law in action.  She’s done wonders for my website, and she gets the mail out.

She keeps a timesheet.  I pay her through a payroll company, which withholds funds for income and social security taxes, among other deductions.

Not every employer is as honest and real-world as I am about the employment relation with a child.  Hiring your child is perfectly legal, in fact, I encourage it, but it must be done carefully and transparently.  Some parents mistakenly believe that if they take some of their income and pay a child, they may take a deduction on the payment to the child and the child will pay tax at a lower marginal rate than the parent: a seeming win-win. Not so.

The IRS frowns on these schemes. The latest person to fall foul of the rules is a Ms. Patricia Diane Ross, who took her case to the Tax Court and lost: T.C. Summary Opinion 2014-68.

Ms. Ross owned a Schedule C business, Ross Professional Services, LLC, that helped government agencies staff their operations.  She had three children, ages 8 through 15.  The children, according to Ms. Ross, shredded paper, stuffed envelopes, copied, sorted checks, filed documents, put out the trash, carried equipment, and helped her shop for supplies. For these tasks, she paid the children.  But she made some mistakes that came back to haunt her:

1. She paid the children in pizza.  Rather than give the children a paycheck, she claimed she kept a ledger of how much they had earned and deducted the cost of their restaurant meals and a tutoring/play activity service from that ledger.  These expenses sounded to the IRS and the Tax Court judge more like the regular kind of support that a parent is expected to give to her children.

When I represented the Commissioner of Internal Revenue, I came across a family that paid their minor children a very regular wage: $5,000 twice a year, two days before the children’s private tuition bill was due.  The tuition bill got paid out of the children’s accounts.

Lesson one: if you employ your children, pay them in money rather than support.

2. She did not pay a regular hourly wage.  Dividing “wages” paid by the hours Ms. Ross reported for each kid resulted in an hourly wage varying from $4 to $30 with little correlation between the child’s age, skill, or task, and the wage paid.

Lesson two: if you hire your child, keep good time sheets and pay a regular wage.

3. She did not withhold Federal income tax or other deductions, saying that the children did not need to file tax returns.  But anyone who makes more than the standard deduction ($6,200) plus the exemption amount must file a tax return.  When the child is being claimed as a deduction on Mom’s tax return, the exemption amount is zero.

Lesson three: treat your employed child as a real employee subject to withholding.

4. The children got paid for chores: “the activities performed by petitioner’s children seem analogous to . . . washing windows, cleaning screens; shoveling snow; moving grass; tending shrubs, trees, and underbrush; assembling papers; picking up mail.”  The Court found these activities sounded more like parental training and discipline, not services performed by an employee for an employer.

Lesson four: pay your children only for tasks that advance the business, not for tasks that advance the household.

5. She did not give the children their own bank accounts.  Well, the children actually had bank accounts about 200 miles away (where their father lives?), but Ms. Ross said she was too busy to open local accounts for them.  Thus, she said, it was “more convenient” to pay for things as the children directed her to, matching spending against their “earnings.”  It does not appear that the judge found this explanation convincing.

Lesson five: give your employed children real accounts in a real bank.

I am pleased to say that, if the IRS were to audit my law firm, it would find that my daughter’s earnings are real earnings and a real deduction from the income I collect.

Mr. Faucher may be reached by writing him at jdf@johndfaucher.com, or by calling 818-889-8080.

Body Piercings and Tattoos, Part 2



By Gary Wartik
April 10, 2015

In our last newsletter, Karen L. Gabler, Esq. of the law firm of LightGabler, LLC of Camarillo, employment law specialists, offered us insights into how to deal with job applicants, adorned with tattoos, nose rings, extra bushy beards and similar body “enhancements,” should be treated in terms of meeting a company’s dress code.

Ms. Gabler told us that in developing a company-wide grooming/appearance policy prohibiting tattoos and piercings, employers should consider the business reasons behind any such prohibitions, as well as the specific job duties of the individual employees.   For example, an employer might wish to prohibit visible tattoos for employees who interact with customers.  In that case, a janitor who works after hours and never interacts with customers might be permitted to have visible tattoos, whereas a customer service representative might be restricted from having visible tattoos.

As the article noted, employers are entitled to hold prospective new employees to the terms of an enforceable dress code, especially for those meeting with customers, clients or patients.  Well, that is good direction for those meeting with prospective employees in an interview setting.  Some of our readers, however raised the question of how to deal with the employee who, at the time of employment reflects a “clean appearance,” then moves into the world of tattoos, nose rings, etc.

In discussing this with Ms. Gabler, she confirmed that with an enforceable dress code in place, the existing employee who changes his/her appearance may be held to the same standards as applied to them when hired.  For those who, subsequent to being hired, violate the dress code, and continue to interact with the company’s clientele, such an employee may be released for violating the dress code, or given the choice of complying with company policy.  As a reminder, however, there are two key tests, they being: 1) Employee interacts with clientele, and 2) The physical adornments are not religious based.

For further questions, please contact us at Vision Economics at gw@visioneconomics.net, or by calling 805-987-7322.

Some Bright Spots in Southern California’s Job Market



Some Bright Spots in Southern California’s Job Market

Written by Gary Wartik:

Improvement in the job market remains somewhat uneven, with the Anderson School of Economics at UCLA predicting statewide job growth during 2014 and 2015 at 1.9 percent and 2.2 percent, respectively.  Most students of the job market would consider such growth not sufficient to reflect a real turnaround in the job market, but rather one that only keeps up with the increase in the population at large. All of this is evidenced by the fact that California’s jobless rate is stuck at 9.8 percent, while the US rate is nearly two points less at 7.9 percent.

There are some sectors in Southern California that offer growth figures comfortably above statewide figures.  Beacon Economics in Los Angeles reported October 1 that the San Fernando Valley and areas of West Los Angles led Los Angeles County in job growth with an overall gain of 3.8 percent during the last 12 months.  Some areas of the San Fernando Valley generated job growth of 6.5 percent.  However, some parts of the state’s largest county saw areas lose jobs.  Sadly, overall county wages actually fell by a disappointing 2.3 percent.  The figures reflect that many new jobs are in sectors that historically pay less, such as hospitality/hotels, home care, office workers, unskilled manufacturing positions and retail. Construction-related jobs, which do pay well reflected one of the bright spots in the Los Angeles  County area report, driven by a reported 28 percent increase in the issuance of multi-family building permits.  As well overall construction permits are up an impressive 20 percent this year, adding $2.9 billion to the economy.

Ventura County job figures also continue to improve, according to a report by Dr. Mark Schneipp of the California Economic Forecast Project in Santa Barbara.  During the last 12 months, 5,000 non-farm jobs were created, with strong gains in health-care, leisure-hospitality and, to a lesser extent, in the professions.  As well, construction in Ventura County is offering the prospects of a turn-around as thousands of housing permits have been issued in 2013.  Construction will begin during the next twelve months, particularly in the city of Camarillo. In terms of labor market strength in California, Ventura County is second only to Orange County in creating new jobs.

In Orange County, job growth for the next twelve months is estimated by the Los Angeles Economic Development Corporation at 1.6 percent, which if predictions are correct, would drive the county’s unemployment rate down to 7.1 percent, with predictions of continued job growth sufficient to drive the unemployment rate to 6.5 percent in 2014.  Orange and Los Angeles Counties have been recognized as the manufacturing base in Southern California with some 500,000 jobs.  While many were lost during the recession, the manufacturing sector is reflecting new relative strength. Other Orange County job strengths have been noted in professional and financial services, along with many of the areas reflected in the Ventura County report.

As we note in our reports, however, what is really needed in an economy that is struggling to recover is the creation of more higher wage jobs.  Such jobs generate the ability of workers to spend in the retail and housing sectors, driving the need for more workers in manufacturing and construction. With 70 percent of the economy linked to retail spending, a stronger retail sector will continue to reflect how well the economy is doing to reach full recovery mode.  With a Los Angeles County unemployment rate lingering at 8 percent, pushing that figure down to 7 percent during the next twelve months remains a challenge that collectively faces all aspects of the public and private sectors.

Our next report will look at the job market in Northern California. In the meantime, if you are a mayor, council member, city manager or finance director, and your community is not performing where it needs to be, please contact us at 805-987-7322 about an analysis of your economic development goals.  Also consider refreshing or a writing a new economic development plan to lead to your community to success.  Vision Economics is ready to help.