I Bet You Didn’t Know There are Tests for Deducting Employee’s Pay!

Laura has decided to open her own spa and is going to be hiring a receptionist as well as other employees to service her customers.  She will be hiring some relatives to help her and she has heard that occasionally wages paid to a relative are not deductible.

Wages paid to family members are deductible, if they are necessary and reasonable, as well as paid or incurred in the year they are being claimed.  There are two tests the IRS will use to measure Laura’s ability to deduct these expenses.

Test #1 – Are the wages Laura is paying to her family members reasonable?  If she is paying an excessive amount, the portion that is deemed to be unwarranted will not be allowed as a deduction.  If the amount Laura pays is consistent with what would be paid to a non-family member for similar services, the full amount will be deductible.  Some other factors that will help Laura determine the reasonableness of the wages paid are the volume of business, amount of responsibility, cost of living in the area, ability of the individual, your business policy regarding pay for employees and the history of pay for all your employees.

Test #2 –  Laura must also ensure that the wages paid are for services performed.  The best option for Laura to keep record of the hours worked by family members is to have everyone clock in on a recording device.  This can be anything from a punching in on a time clock to an employee portal that will track the hours worked.  Keeping accurate records is the key to passing this test.

Now that Laura knows about the two tests that will have to be reached for a tax deduction, she will also need to know more about the different kinds of pay that she can provide and the limitations.

Come back on Monday to find out more about employee pay or you can contact us at info@excerebus.com or 407-988-5647.

Categories: Tax Information

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