Jump to content

What’s a reasonable salary for a six-year-old’s part-time work?


Peter Gulia
 Share

Recommended Posts

Many small-business 401(k) plans allow an owner’s young children as participants.

To support contributions, the child must be capable of, and actually perform, real work that is useful to the business.  Likewise, the business must pay no more than reasonable compensation for that work.

Sometimes, the facts call into question how real the child’s job or pay is.  For example, some might wonder whether a six-year-old (who presumably attends school during about 80% of a year) does enough work to earn $24,000, or even $20,000, in a year’s wages.

Which facts are bad enough that you would suggest a client needs advice about whether the IRS would see the child’s wages as a sham?

If the business does no advertising (or uses none in which a model’s image would appear), is there an age that is too young for an owner’s child to be a worker?

Link to comment
Share on other sites

Well, as a TPA it's not my place, but whenever we are discussing wages to family members I tell them the pay has to be reasonable for the services rendered.  

Now, as an employer who did this myself with 4 kids, one year I actually got a letter from the SSA questioning the wages to my youngest daughter based on her age.  The kids did come into the office at least a couple of times a month to fold, stuff and mail billing statements and the occasional mass mailing (I'm old - snailmail BITD).  I was paying them more than minimum wage, but not excessively so, at least not IMO.  IIRC I kept them under the 1040 filing threshold.  

Absent use of likeness, I'd not be comfortable with $24K for a 6 year old, that's for sure.   I generally discourage letting really young kids into the plan, even if there are no NHCEs.  One reason is the reasonableness issue, the other is I'm a big fan of having the parents gift the kids enough money every year for a Roth IRA contribution assuming the kids have earned income.  

  • Like 2
Link to comment
Share on other sites

If I mention it, the question back is typically "how much do I pay them?"   I explain that I can tell them the impact on plan contributions for various levels of pay but I recommend they consult with their CPA regarding the "reasonableness" of compensation, since they want to deduct it on the business return.   I also tell them if the IRS disallows the deduction for the kids' wages it will then disallow their related plan contributions as well, and this can lead to all sorts of unpleasantness.  I will usually end this part of the discussion pointing out the 15.3% payroll tax they incur and remind them that "pigs get fat, hogs get slaughtered.  Don't be a hog."

  • Like 2
Link to comment
Share on other sites

My position is that we inform the client (on the record for CYA purposes) of the reasonable compensation requirement and that it is up to the client, hopefully with formal input from their accountant and/or legal counsel, to determine reasonableness. If it flies (with or without subsequent scrutiny) then great, and if it doesn't you have the "I warned you/I told you so" in your defense - not that a legal defense is needed.

26 minutes ago, shERPA said:

remind them that "pigs get fat, hogs get slaughtered

And YES - that is always sound advice!

  • Like 1
Link to comment
Share on other sites

45 minutes ago, shERPA said:

... and remind them that "pigs get fat, hogs get slaughtered.  Don't be a hog."

There's an extension to that I've used in dealing with clients:  "Pigs get fat, hogs get slaughtered, and attorney's eat bacon."

Translation:  If you want to do something, pay me now (to fully vet the proposal), or pay me much, much more later (when it blows up).

 

  • Like 2
  • Haha 1
Link to comment
Share on other sites

Think I mentioned it before but I have a client who has his wife and 2 daughters on the payroll and they don't show up ever!  The daughters have high paying jobs elsewhere and the wife doesn't work at all.  But each year they all get a W2, their 401ks maxed out out of 1 paycheck, profit sharing and SH match.  Nice deal if you can get it.  Client's CPA is a friend of mine so it's absolutely true. 

Link to comment
Share on other sites

4 hours ago, RatherBeGolfing said:

What is the going rate for data entry and census review?  😎

 

You couldn't pay me enough.....  ☺️

  • Like 1
Link to comment
Share on other sites

Five years old is when I began support work in my father’s accounting practice.

He taught me numbers, from 000001 to 999999, before the elementary school taught me any.

Alas, neither 401(k) nor any IRA then existed; and my wages was $0.00.

  • Like 1
Link to comment
Share on other sites

10 minutes ago, Peter Gulia said:

Alas, neither 401(k) nor any IRA then existed; and my wages was $0.00.

Au contraire...  You were fed, housed, schooled, and learned valuable life lessons - including analysis and a work ethic -of which all of us here on Benefitslink benefit from your presence daily!

  • Like 1
Link to comment
Share on other sites

On 7/30/2021 at 4:40 PM, Bill Presson said:

It would likely be more accurate than some data we get from employers.

It just makes you shake your head sometimes...I don't know how many times I've wondered how these people get out of their driveway without hitting their own mailbox.

  • Like 1
Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...