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agri plan doc

G.      Wages paid to family members who work for the sole proprietor are also deductible as a business expense. In certain situations, sole proprietors can realize significant tax savings by hiring family members as legitimate employees. Before looking at the tax benefits, let's review the definition of employment:

  1. The employee performs services under the direction of employer as to what must be done and how.
  2. Employees are paid regularly, and if necessary in the particular job, they keep track of time spent.
  3. An employer-employee relationship must exist.

NOTE: The performance of only a nominal service is likely to be challenged by the IRS. In addition, the IRS may argue that a spouse is in fact a partner, not an employee. This is especially true if the spouse invested significant capital or if it appears there is co- ownership of the business.

4.    Following is a suggested checklist for your use in helping clients determine if a legitimate employer employee relationship exists.

MUST ANSWER YES TO ALL:

10 Point Checklist for Family Employees

Any box checked No indicates a questionable deduction

 

Yes

No

1

Is there a written employment contract between the parties?

 

 

2

Are time records kept at that time of work performance?

 

 

3

Is there a written job description?

 

 

4

Is the employee paid periodically?

 

 

5

Is there an 1-9 on file for the employee?

 

 

6

Is there a W-4 on file for the employee?

 

 

7

Are payroll tax returns filed regularly? (Quarterly 941s and  annual 940)

 

 

8

Are W-2s issued?

 

 

9

Does the employee deposit the check in an  account other than the business account?

 

 

10

Is the employees wage comparable to fair market wages for equivalent work?

 

 

 

                                                                        GEAR UP 2008          Page 443
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