March 16, 2005

Employing Family Members

If you employed any of your family members, in order to enjoy the huge tax benefits described in Chapter VI of 'It's How Much You KEEP, That Counts! Not how much you Make,' hereare the six items you will need to documentation in order to audit-proof Wages Paid to Employees on your 2004 Tax Return.

1. Be able to prove that the family member was 'officially' hired. Have a signed Employment Agreement for each individual you employed. (A fill-in-the-blanks Employment Agreement that is IRS-compliant, has been provided in the Appendix of 'It's How Much You KEEP, That Counts! Not how much you Make.)

The Agreement should spell out his/her duties and responsibilities, and specify the amount of wages to be paid and when wages will be paid (monthly, bi-weekly, etc.) Put a copy of this Agreement in your tax file.

2. Be able to prove that the wages are reasonable and proper for the type of duties being performed. Managing your prospect database would logically pay a higher wage than stuffing envelopes for a mass mailing. If you get an estimate from an outside company, as a way of determining a reasonable wage level, get their estimate in writing, and put a copy in your tax file, attached to the Employment Agreement.

3. Be able to prove that the work was actually performed. Performance logs, notations in a daily diary, and time-sheets are all acceptable. Put copies in your tax file.

4. Be able to prove that you (a) actually paid the wages, and that you (b) paid them on a regular and timely basis - at least monthly, but twice-monthly or bi-weekly is even better. Both (a) and (b) can be proven best with cancelled checks - preferably written from a separate Business Checking Account.

5. Be able to prove that you paid Medicare and Social Security taxes on any adult family members employed in your business. Form 941 should have been filed, along with the appropriate tax payment, on a quarterly basis; and a Form 940 should have been filed at the end of the year.

6. Be sure that you provided a W-2 to each family member employee, even minor children.

If you cannot adequately document some of these six requirements, don't give up quite yet. If you work with a tax preparer who is an expert in small-business tax law, in some cases, you may be able to 'reconstruct' the missing documentation.

If you honestly did comply with all six requirements, or at least all of the ones you had known about (but cannot reconstruct the back-up), see tomorrow's Tax Tip You Can Bank On.' Tomorrow we will talk about the little-known IRS Form 8275. It can be worth it's weight in gold!

Now there's a 'Tax Tip You Can Bank On! More tomorrow.

P.S. -- If you need expert tax help, visit www.HomeBusinessTaxSavings.com, and click on the tab on the left labeled, Need Tax Help?'

P.P.S. - Need some 1-on-1 private coaching? Visit www.HomeBusinessTaxSavings.com, and click on 'Products & Services.' Then look under the flashing 'NEW' icon.
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