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The IRS has announced a second Voluntary Disclosure Program for employers to resolve erroneous claims for credit or refund involving the COVID-19 Employee Retention Credit (ERC). Participation in the second ERC Voluntary Disclosure Program is limited to ERC claims filed for the 2021 tax period(s), and cannot be used to disclose and repay ERC money from tax periods in 2020.

The IRS has announced a second Voluntary Disclosure Program for employers to resolve erroneous claims for credit or refund involving the COVID-19 Employee Retention Credit (ERC). Participation in the second ERC Voluntary Disclosure Program is limited to ERC claims filed for the 2021 tax period(s), and cannot be used to disclose and repay ERC money from tax periods in 2020.

The program is designed to help businesses with questionable claims to self-correct and repay the credits they received after filing erroneous ERC claims, many of which were driven by aggressive marketing from unscrupulous promoters.

The first ERC Voluntary Disclosure Program was announced in late December 2023, and ended on March 22, 2024 (Announcement 2024-3, I.R.B. 2024-2, 364). Over 2,600 taxpayers applied to the first program to resolve their improper ERC claims and avoid civil penalties and unnecessary litigation.

The second ERC Voluntary Disclosure Program will allow businesses to correct improper payments at a 15-percent discount, and avoid future audits, penalties and interest.

Procedures for Second Voluntary Disclosure Program

To apply, employers must file Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, and submit it through the IRS Document Upload Tool. Employers must provide the IRS with the names, addresses, telephone numbers and details about the services provided by any advisors or tax preparers who advised or assisted them with their claims, and are expected to repay their full ERC claimed, minus the 15-percent reduction allowed through the Voluntary Disclosure Program.

Eligible employers must apply by 11:59 pm local time on November 22, 2024.

The Department of the Treasury and the IRS released statistics on the Inflation Reduction Act clean energy tax credits for the 2023 tax year. Taxpayers have claimed over $6 billion in tax credits for residential clean energy investments and more than $2 billion for energy-efficient home improvements on 2023 tax returns filed and processed through May 23, 2024.

The Department of the Treasury and the IRS released statistics on the Inflation Reduction Act clean energy tax credits for the 2023 tax year. Taxpayers have claimed over $6 billion in tax credits for residential clean energy investments and more than $2 billion for energy-efficient home improvements on 2023 tax returns filed and processed through May 23, 2024.

For the Residential Clean Energy Credit, 1,246,440 returns were filed, with a total credit value of $6.3 billion and an average of $5,084 per return. Specific investments include:

• Rooftop solar: 752,300 returns, up to 30 percent of the cost;
• Batteries: 48,840 returns, up to 30 percent of the cost.

For the Energy Efficient Home Improvement Credit, 2,338,430 returns were filed, with a total credit value of $2.1 billion and an average of $882 per return. Specific improvements include:

• Home insulation: 669,440 returns, up to 30 percent of the cost;
• Windows and skylights: 694,450 returns, up to 30 percent of the cost or $600;
• Central air conditioners: 488,050 returns, up to 30 percent of the cost or $600;
• Doors: 400,070 returns, up to 30 percent of the cost, $250 per door or $500 total;
• Heat pumps: 267,780 returns, up to 30 percent of the cost or $2,000;
• Heat pump water heaters: 104,180 returns, up to 30 percent of the cost or $2,000.

Internal Revenue Service Commissioner Daniel Werfel is calling on Congress to maintain the agency’s funding and not make any further cuts to the supplemental funding provided to the agency in the Inflation Reduction Act, using recent successes in customer service and compliance to validate his request.

Internal Revenue Service Commissioner Daniel Werfel is calling on Congress to maintain the agency’s funding and not make any further cuts to the supplemental funding provided to the agency in the Inflation Reduction Act, using recent successes in customer service and compliance to validate his request.

"The Inflation Reduction Act funding is making a difference for taxpayers, and we will build on these improvements in the months ahead," Werfel said during a July 24, 2024, press teleconference, adding that "for this progress to continue, we must maintain a reliable, consistent annual appropriations for the agency as well as keeping the Inflation Reduction Act funding intact."

During the call, Werfel highlighted a number of improvements to IRS operations that have come about due to the IRA funding, including expansion of online account features (such as providing more digital forms, making it easier to make online payments, and making access in general easier); providing more access to taxpayers wanting face-to-face assistance (including a 37 percent increase in interactions at taxpayer assistance centers); IT modernization; and the collection of more than $1 billion in taxes due form high wealth individuals.

Werfel did highlight an area where he would like to see some improvements, including the number of taxpayers who have activated their online account.

While he did not have a number of how many taxpayers have activated their accounts so far, he said that “"we are nowhere near where we have the opportunity to be,"” adding that as functionality improves and expands, that will bring more taxpayers in to use their online accounts and other digital services.

He also noted that online accounts will be a deterrent for scams, and it will provide taxpayers with the information they need to not be fooled by scammers.

“We see the online account as a real way to test these scams and schemes because taxpayers will have a single source of truth about whether they actually owe a debt, whether the IRS is trying to reach them, and also information we can push out to taxpayers more regularly if they sign up and opt in for it on the latest scams and schemes,” Werfel said.

By Gregory Twachtman, Washington News Editor

The IRS has intensified its efforts to scrutinize claims for the Employee Retention Credit (ERC), issuing five new warning signs of incorrect claims. These warning signs, based on common issues observed by IRS compliance teams, are in addition to seven problem areas previously highlighted by the agency. Businesses with pending or previously approved claims are urged to carefully review their filings to confirm eligibility and ensure credits claimed do not include any of these twelve warning signs or other mistakes. The IRS emphasizes the importance of consulting a trusted tax professional rather than promoters to ensure compliance with ERC rules.

The IRS has intensified its efforts to scrutinize claims for the Employee Retention Credit (ERC), issuing five new warning signs of incorrect claims. These warning signs, based on common issues observed by IRS compliance teams, are in addition to seven problem areas previously highlighted by the agency. Businesses with pending or previously approved claims are urged to carefully review their filings to confirm eligibility and ensure credits claimed do not include any of these twelve warning signs or other mistakes. The IRS emphasizes the importance of consulting a trusted tax professional rather than promoters to ensure compliance with ERC rules.

The newly identified issues include essential businesses claiming ERC despite being fully operational, unsupported government order suspensions, misreporting wages paid to family members, using wages already forgiven under the Paycheck Protection Program, and large employers incorrectly claiming wages for employees who provided services. The IRS plans to deny tens of thousands of claims that show clear signs of being erroneous and scrutinize hundreds of thousands more that may be incorrect. In addition, the IRS announced upcoming compliance measures and details about reopening the Voluntary Disclosure Program, aimed at addressing high-risk ERC claims and processing low-risk payments to help small businesses with legitimate claims.

IRS Commissioner Danny Werfel emphasized the agency’s commitment to pursuing improper claims and increasing payments to businesses with legitimate claims. Promoters lured many businesses into mistakenly claiming the ERC, leading to the IRS digitizing and analyzing approximately 1 million ERC claims, representing over $86 billion. The IRS urges businesses to act promptly to resolve incorrect claims, avoiding future issues such as audits, repayment, penalties, and interest. Taxpayers should recheck their claims with the help of trusted tax professionals, considering options such as the ERC Withdrawal Program or amending their returns to correct overclaimed amounts.

The IRS, in collaboration with state tax agencies and the national tax industry, has initiated a new effort to tackle the rising threat of tax-related scams. This initiative, named the Coalition Against Scam and Scheme Threats (CASST), was launched in response to a significant increase in fraudulent activities during the most recent tax filing season. These scams have targeted both individual taxpayers and government systems, seeking to exploit vulnerabilities for financial gain.

The IRS, in collaboration with state tax agencies and the national tax industry, has initiated a new effort to tackle the rising threat of tax-related scams. This initiative, named the Coalition Against Scam and Scheme Threats (CASST), was launched in response to a significant increase in fraudulent activities during the most recent tax filing season. These scams have targeted both individual taxpayers and government systems, seeking to exploit vulnerabilities for financial gain.

CASST will focus on three primary objectives: enhancing public outreach and education to alert taxpayers to emerging threats, developing new methods to identify fraudulent returns at the point of filing, and improving the infrastructure to protect taxpayers and the integrity of the tax system. This initiative builds on the successful framework of the Security Summit, which was launched in 2015 to combat tax-related identity theft. While the Security Summit made significant progress in reducing identity theft, CASST aims to address a broader range of scams, reflecting the evolving tactics of fraudsters.

The coalition has received widespread support, with over 60 private sector groups, including leading software and financial companies, joining the effort. Key national tax professional organizations are also participating, all committed to strengthening the security of the tax system.

Among the measures CASST will implement are enhanced validation processes for tax preparers, including improvements to the Electronic Filing Identification Number (EFIN) and Preparer Tax Identification Number (PTIN) systems. The coalition will also target the issue of ghost preparers, who prepare tax returns for a fee without proper disclosure, leading to inflated refunds and significant revenue losses.

In addition to these technical improvements, CASST will address specific scams, such as fraudulent claims for tax credits like the Fuel Tax Credit. By the 2025 filing season, CASST aims to have new protections in place, bolstering defenses across both public and private sectors to make it more difficult for scammers to exploit the tax system. This coordinated effort seeks to protect taxpayers and ensure the integrity of the nation’s tax system.

The Internal Revenue Service will be processing about 50,000 "low-risk" Employee Retention Credit claims, and it will be shifting the moratorium dates on processing.

The Internal Revenue Service will be processing about 50,000 "low-risk"Employee Retention Credit claims, and it will be shifting the moratorium dates on processing.

"The IRS projects payments will begin in September with additional payments going out in subsequent weeks," the agency said in an August 8, 2024, statement."The IRS anticipates adding another large block of additional low-risk claims for processing and payment in the fall."

The agency also announced that it is shifting the moratorium period on processing new claims. Originally, the agency was not processing claims that were filed after September 14, 2023. It is now going to process claims filed between September 14, 2023, and January 31, 2024.

"Like the rest of the ERC inventory, work will focus on the highest and lowest risk claims at the top and bottom end of the spectrum," the IRS said. "This means there will be instances where the agency will start taking actions on claims submitted in this time period when the agency has seen a sound basis to pay or deny any refund claim."

The agency also said it has sent out "28,000 disallowance letters to businesses whose claims showed a high risk of being incorrect," preventing up to $5 billion in improper payments. It also has "thousands of audits underway, and 460 criminal cases have been initiated" with potentially fraudulent claims worth nearly $7 billion. Thirty-seven investigations have resulted in federal charges, with 17 resulting in convictions.

Businesses that receive a denial letter will have the ability to appeal the decision.

The agency also offered some other updates on the ERC program, including:

• The claim withdrawal process for unprocessed ERC has led to more than 7,300 withdrawing $677 million in claims;
• The voluntary disclosure program received more than 2,600 applications from ERC recipients that disclosed $1.09 billion in credits; and
• The IRS Office of Promoter Investigations has received "hundreds" of referrals about suspected abusive tax promoters and preparers improperly promoting the ability to claim the ERC.

"The IRS is committed to continuing out work to resolve this program as Congress contemplates further action, both for the good of legitimate businesses and tax administration," IRS Commissioner Daniel Werfel said in the statement.

By Gregory Twachtman, Washington News Editor

The IRS has announced substantial progress in its ongoing efforts to modernize tax administration, emphasizing a shift towards digital interactions and enhanced measures to combat tax evasion. This update, part of a broader 10-year plan supported by the Inflation Reduction Act, reflects the agency's commitment to improving taxpayer services and ensuring fairer compliance.

The IRS has announced substantial progress in its ongoing efforts to modernize tax administration, emphasizing a shift towards digital interactions and enhanced measures to combat tax evasion. This update, part of a broader 10-year plan supported by the Inflation Reduction Act, reflects the agency's commitment to improving taxpayer services and ensuring fairer compliance.

The IRS’s push for digital transformation has seen significant advancements, allowing taxpayers to conduct nearly all interactions with the agency online. This initiative aims to reduce the reliance on paper submissions, expedite tax processing, and improve overall efficiency. In 2024 alone, the IRS introduced extended hours at Taxpayer Assistance Centers across the country, particularly benefiting rural and underserved communities. The agency also reported a notable increase in face-to-face interactions, with a 37 percent rise in contacts during the 2024 filing season.

In parallel with these service improvements, the IRS has ramped up efforts to disrupt complex tax evasion schemes. Leveraging advanced data science and technology, the agency has focused on high-income individuals and entities employing sophisticated financial maneuvers to avoid taxes. Among the IRS’s new measures is a moratorium on processing Employee Retention Credit claims to prevent fraud, alongside initiatives targeting abusive use of partnerships and improper corporate practices.

The IRS also highlighted its progress in eliminating paper filings through the introduction of the Document Upload Tool, which allows taxpayers to submit documents electronically. This tool, along with upgraded scanning and mail-sorting equipment, is expected to significantly reduce the volume of paper correspondence, potentially replacing millions of paper documents each year. These technological upgrades are part of the IRS’s broader goal to create a fully digital workflow, thereby speeding up refunds and improving service accuracy.

Additionally, the IRS has launched new programs to ensure taxpayers are informed about and can claim eligible credits and deductions. This includes outreach efforts related to the Child Tax Credit and the Earned Income Tax Credit, aiming to bridge the gap for eligible taxpayers who may not have claimed these benefits. These initiatives underline the IRS's dedication to a more equitable tax system, ensuring that all taxpayers have access to the credits and services they are entitled to while maintaining robust compliance standards.

These days, both individuals and businesses buy goods, services, even food on-line. Credit card payments and other bills are paid over the internet, from the comfort of one's home or office and without any trip to the mailbox or post office.

Now, what is probably your biggest "bill" can be paid on-line: your federal income taxes.

There are three online federal tax payment options available for both businesses and individuals: electronic funds withdrawal, credit card payments and the Electronic Federal Tax Payment System. If you are not doing so already, you should certainly consider the convenience -and safety-- of paying your tax bill online.  While all the options are now "mainstream" and have been used for at least several years, safe and convenient, each has its own benefits as well as possible drawbacks. The pros and cons of each payment option should be weighed in light of your needs and preferences.

Electronic Funds Withdrawal

Electronic funds withdrawal (or EFW) is available only to taxpayers who e-file their returns. EFW is available whether you e-file on your own, or with the help of a tax professional or software such as TurboTax. E-filing and e-paying through EFW eliminates the need to send in associated paper forms.

Through EFW, you schedule when a tax payment is to be directly withdrawn from your bank account. The EFW option allows you to e-file early and, at the same time, schedule a tax payment in the future. The ability to schedule payment for a specific day is an important feature since you decide when the payment is taken out of your account. You can even schedule a payment right up to your particular filing deadline.

The following are some of the tax liabilities you can pay with EFW:

• Individual income tax returns (Form 1040)
• Trust and estate income tax returns (Form 1041)
• Partnership income tax returns (Forms 1065 and 1065-B)
• Corporation income tax returns for Schedule K-1 (Forms 1120, 1120S, and 1120POL)
• Estimated tax for individuals (Form 1040)
• Unemployment taxes (Form 940)
• Quarterly employment taxes (Form 941)
• Employers annual federal tax return (Form 944)
• Private foundation returns (Form 990-PF)
• Heavy highway vehicle use returns (Form 2290)
• Quarterly federal excise tax returns (Form 720)

For a return filed after the filing deadline, the payment is effective on the filing date. However, electronic funds withdrawals can not be initiated after the tax return or Form 1040 is filed with the IRS. Moreover, a scheduled payment can be canceled up until two days before the payment.

EFW does not allow you to make payments greater than the balance you owe on your return. Therefore, you can't pay any penalty or interest due through EFW and would need to choose another option for these types of payments. While a payment can be cancelled up to two business days before the scheduled payment date, once your e-filed return is accepted by the IRS, your scheduled payment date cannot be changed. Thus, if you need to change the date of the payment, you have to cancel the original payment transaction and chose another payment method. Importantly, if your financial institution can't process your payment, such as if there are insufficient funds, you are responsible for making the payment, including potential penalties and interest. Finally, while EFW is a free service provided by the Treasury, your financial institution most likely charges a "convenience fee."

Credit Card Payments

Do you have your card ready? The Treasury Department is now accepting American Express, Discover, MasterCard, and VISA.

Both businesses and individual taxpayers can make tax payments with a credit card, whether they file a paper return or e-file. A credit card payment can be made by phone, when e-filing with tax software or a professional tax preparer, or with an on-line service provider authorized by the IRS. Some tax software developers offer integrated e-file and e-pay options for taxpayers who e-file their return and want to use a credit card to pay a balance due.

However, there is a convenience fee charged by service providers. While fees vary by service provider, they are typically based on the amount of your tax payment or a flat fee per transaction. For example, you owe $2,500 in taxes and your service provider charges a 2.49% convenience fee. The total fee to the service provider will be $62.25. Generally, the minimum convenience fee is $1.00 and they can rise to as much as 3.93% of your payment.

The following are some tax payments that can be made with a credit card:

• Individual income tax returns (Form 1040)
• Estimated income taxes for individuals (Form 1040-ES)
• Unemployment taxes (Form 940)
• Quarterly employment taxes (Form 941)
• Employers annual federal tax returns (Form 944)
• Corporate income tax returns (Form 1120)
• S-corporation returns (Form 1120S)
• Extension for corporate returns (Form 7004)
• Income tax returns for private foundations (Form 990-PF)

However, as is the case is with the EFW option, if a service provider fails to forward your payment to the Treasury, you are responsible for the missed payment, including potential penalties and interest.

Electronic Federal Tax Payment System

EFTPS is a system that allows individuals and businesses to pay all their federal taxes electronically, including income, employment, estimated, and excise taxes. EFTPS is available to both individuals and businesses and, once enrolled, taxpayers can use the system to pay their taxes 24 hours a day, seven days a week, year round. Businesses can schedule payments 120 days in advance while individuals can schedule payments 365 days in advance. With EFTPS, you indicate the date on which funds are to be moved from your account to pay your taxes. You can also change or cancel a payment up to 2 business days in advance of the scheduled payment date.

EFTPS is an ideal payment option for taxpayers who make monthly installment agreement payments or quarterly 1040ES estimated payments. Businesses should also consider using EFTPS to make payments that their third-party provider is not making for them.

EFTPS is a free tax payment system provided by the Treasury Department that allows you to make all your tax payments on-line or by phone. You must enroll in EFTPS, however, but the process is simple.

We would be happy to discuss these payment options and which may best suit your individual or business needs. Please call our office learn more about your on-line federal tax payment options.

In order to be tax deductible, compensation must be a reasonable payment for services. Smaller companies, whose employees frequently hold significant ownership interests, are particularly vulnerable to IRS attack on their compensation deductions.

In order to be tax deductible, compensation must be a reasonable payment for services. Smaller companies, whose employees frequently hold significant ownership interests, are particularly vulnerable to IRS attack on their compensation deductions.

Reasonable compensation is generally defined as the amount that would ordinarily be paid for like services by like enterprises under like circumstances. This broad definition is supplemented, for purposes of determining whether compensation is deductible as an ordinary and necessary expense, by a number of more specific factors expressed in varying forms by the IRS, the Tax Court and the Circuit Courts of Appeal, and generally relating to the type and extent of services provided, the financial concerns of the company, and the nature of the relationship between the employee and the employer.

Why IRS Is Interested

A chief concern behind the IRS's keen interest in what a company calls "compensation" is the possibility that what is being labeled compensation is in fact a constructive dividend. If employees with ownership interests are being paid excessive amounts by the company, the IRS may challenge compensation deductions on the grounds that what is being called deductible compensation is, in fact, a nondeductible dividend.

Another area of concern for the IRS is the payment of personal expenses of an employee that are disguised as businesses expenses. There, the business is trying to obtain a business expense deduction without the offsetting tax paid by the employee in recognizing income. In such cases, a business and its owners can end up with a triple loss after an IRS audit: taxable income to the individual, no deduction to the business and a tax penalty due from both parties.

Factors Examined

The factors most often examined by the IRS in deciding whether payments are reasonable compensation for services or are, instead, disguised dividend payments, include:

1. The salary history of the individual employee
2. Compensation paid by comparable employers to comparable employees
3. The salary history of other employees of the company
4. Special employee expertise or efforts
5. Year-end payments
6. Independent inactive investor analysis
7. Deferred compensation plan contributions
8. Independence of the board of directors
9. Viewpoint of a hypothetical investor contemplating purchase of the company as to whether such potential investor would be willing to pay the compensation.

Failure to pass the reasonable compensation test will result in the company's loss of all or part of its deduction. Analysis and examination of a company's compensation deductions in light of the relevant listed factors can provide the company with the assurance that the compensation it pays will be treated as reasonable -- and may in the process prevent the loss of its deductions.

Note: In the case of publicly held corporations, a separate $1 million dollar per person cap is also placed on deductible compensation paid to the CEO and each of the four other highest-paid officers identified for SEC purposes. (Certain types of compensation, including performance-based compensation approved by outside directors, are not included in the $1 million limitation.)

The S Corp Enigma

The opposite side of the reasonable compensation coin is present in the case of some S corporations. By characterizing compensation payments as dividends, the owners of these corporations seek to reduce employment taxes due on amounts paid to them by their companies. In these cases, the IRS attempts to recharacterize dividends as salary if the amounts were, in fact, paid to the shareholders for services rendered to the corporation.

Caution. In the course of performing the compensation-dividend analysis, watch out for contingent compensation arrangements and for compensation that is proportional to stock ownership. While not always indicators that payments are distributions of dividends instead of compensation for services, their presence does suggest the possibility. Compensation plans should not be keyed to ownership interests. Contingent and incentive arrangements are also scrutinized by the IRS. The courts have frequently ruled that a shareholder has a built-in interest in seeing that the company is successful and rewarding him for increasing the value of his own property is inappropriate. Similar to the reasonable compensation test, however, this rule is not hard and fast. Accordingly, the rules followed in each jurisdiction will control there.

Conclusions

Determining whether a shareholder-employee's compensation is reasonable depends upon many variables, such as the contributions that employee makes to your business, the compensation levels within your industry, and whether an independent investor in your company would accept the employee's compensation as reasonable.

Please call our office for a more customized analysis of how your particular compensation package fits into the various rules and guidelines. Further examination of your practices not only may help your business better sustain its compensation deductions; it may also help you take advantage of other compensation arrangements and opportunities.

If someone told you that you could exchange an apartment house for a store building without recognizing a taxable gain or loss, you might not believe him or her. You might already know about a very valuable business planning and tax tool: a like-kind exchange. In some cases, if you trade business property for other business property of the same asset class, you do not need to recognize a taxable gain or loss.

Not a sale

An exchange is a transfer that is not a sale. Essentially, it is a trade of like property.

In an exchange, property is relinquished and property is received. If the transaction includes money or property that is not of a like kind (referred to as "boot"), the transaction does not automatically become a sale. Any gain realized in the transaction, however, is recognized in that tax year to the extent of boot received.

In a like-kind exchange, the basis in the property received is the same as the basis in the property relinquished, with some adjustments. Any unrecognized gain or loss on the relinquished property is carried over to the replacement property. At a future time, the gain or loss will be recognized. If there is boot in the exchange and the gain is recognized, basis is increased by the amount of recognized gain.

The like-kind rules also require that property must be business or investment property. The taxpayer must hold both the property traded and the property received for productive use in its trade or business or for investment. Additionally, most stocks, bonds and other securities are not eligible.

Example

Jesse owns an office supply company and wants to expand his business. Carmen owns a restaurant and also wants to expand her business. Both individuals own parcels of land for investment that would benefit their respective expansion plans. The adjusted basis of both properties is $250,000. The fair market value of both properties is $400,000. Jesse and Carmen engage in a like-kind exchange. Neither Jesse nor Carmen would report any gain or loss.

More than two properties

Like-kind exchanges can involve more than two properties. While the rules are complicated, the basic approach is to combine properties into groups consisting of the same kind or class. If you are interested in a like-kind exchange involving more than two properties, we can help you.

Timing

The exchange does not have to take place at a given moment. If property is relinquished, the replacement property can be identified and received anytime within a specific period. Replacement property must be identified within 45 days after property is relinquished. The replacement property has to be received within 180 days after the transfer but sooner if the tax return is due before the 180 days are over (although the due date takes into account any extension that is permitted).

Reporting

A like-kind exchange must be reported to the IRS. The report must be made even if no gain is recognized in the transaction.  Again, our office can help you make sure that everything that needs to be reported to the IRS is reported.

Whether a parent who employs his or her child in a family business must withhold FICA and pay FUTA taxes will depend on the age of the teenager, the amount of income the teenager earns and the type of business.

FICA and FUTA taxes

A child under age 18 working for a parent is not subject to FICA so long as the parent's business is a sole proprietorship or a partnership in which each partner is a parent of the child (if there are additional partners, the taxes must be withheld). FUTA does not have to be paid until the child reaches age 21. These rules apply to a child's services in a trade or business.

If the child's services are for other than a trade or business, such as domestic work in the parent's private home, FICA and FUTA taxes do not apply until the child reaches 21.

The rules are also different if the child is employed by a corporation controlled by his or her parent. In this case, FICA and FUTA taxes must be paid.

Federal income taxes

Federal income taxes should be withheld, regardless of the age of the child, unless the child is subject to an exemption. Students are not automatically exempt, though. The teenager has to show that he or she expects no federal income tax liability for the current tax year and that the teenager had no income tax liability the prior tax year either. Additionally, the teenager cannot claim an exemption from withholding if he or she can be claimed as a dependent on another person's return, has more than $250 unearned income, and has income from both earned and unearned sources totaling more than $800.

Bona fide employee

Remember also, that whenever a parent employs his or her child, the child must be a bona fide employee, and the employer-employee relationship must be established or the IRS will not allow the business expense deduction for the child's wages or salary. To establish a standard employer-employee relationship, the parent should assign regular duties and hours to the child, and the pay must be reasonable with the industry norm for the work. Too generous pay will be disallowed by the IRS.