Meet the Business Owner Who Claims to Have Cracked the Code for Avoiding Taxes

A recent episode of Caleb Hammer’s Financial Audit featured a guest who seemed to exude a sense of calm and confidence when discussing his tax strategy. The business owner claimed to have figured out a way to avoid paying the Internal Revenue Service (IRS) by hiring his children as employees. According to him, his 9-year-old son cuts grass, his 13-year-old daughter cuts grass, and his two youngest children can model for his advertising. He believes that by paying his children up to $15,000 a year, he can claim tax deductions for his business and avoid paying taxes.

When asked about the potential risks of not filing taxes for four years, the guest seemed unconcerned, stating that the IRS wouldn’t bother him. He even claimed that his certified public accountant (CPA) had approved of his strategy. However, as we’ll explore in this article, the business owner’s confidence may be misplaced.

What He’s Right About

While the business owner’s strategy may seem far-fetched, there is some truth to his claims. Parents are allowed to hire their children and gain tax advantages, as long as the work is deemed necessary, age-appropriate, and payment is in line with the going market rate. The U.S. Department of Labor (DOL) allows parents to employ their own children under 16 in a business they wholly own, provided it’s not manufacturing, mining, or a job declared hazardous.

The IRS also states that payments for the services of a child under 18 aren’t subject to Social Security and Medicare taxes if the business is a sole proprietorship or a partnership where each partner is also the child’s parent. This means that the business owner’s children would not owe federal income tax on their earnings, as long as they are under the standard deduction of $16,100 for a single filer in 2026. However, withholding still comes out of a child’s paycheck, and they only get it back by filing their tax return.

Where His Argument Falls Apart

The business owner’s claim that he gets deductions for hiring his children as employees is not entirely accurate. A deduction only counts when you claim it on a return and file it. The IRS can potentially create a substitute for return for him, using the income it already knows about, and it may not credit him with the deductions he’s been counting on to lower his tax bill. Depending on whether he’s able to pay that bill, it could lead to a levy or a lien.

The IRS also charges more for not filing than for not paying. Skipping your return altogether costs 5% of what you owe each month, whereas skipping payment costs 0.5% of what you owe monthly in fees. This means that the business owner’s strategy may not be as risk-free as he thinks.

Why ‘My CPA Signed Off’ Doesn’t Rescue Him from the IRS

The business owner may think that once a CPA takes over his taxes, the responsibility shifts to them. However, as a Supreme Court ruling from 1985 demonstrates, relying on a lawyer or accountant is not a substitute for compliance with an unambiguous statute. The court ruled that Robert Boyle, who hired a lawyer to handle his mother’s estate, was still responsible for filing taxes on time, even though the lawyer forgot to put the deadline on his calendar.

The same principle applies to the business owner’s situation. His CPA may have approved of his strategy, but that doesn’t mean he’s exempt from the consequences of not filing taxes. The IRS has the authority to create a substitute for return for him, and he may still be liable for any taxes owed.

What To Do Instead

While the business owner’s strategy may seem appealing, it’s essential to understand the potential risks and consequences. Instead of trying to avoid taxes, it’s better to focus on legitimate tax savings strategies, such as hiring your children as employees and claiming deductions for business expenses.

By following the rules and regulations set by the IRS, you can ensure that you’re taking advantage of all the tax benefits available to you. Don’t risk facing penalties and fines by trying to skirt the system. Stay informed and stay compliant, and you’ll be on your way to saving money on taxes.