Employing Minors and Your Small Business

As a small business owner, you can deduct salaries you pay to employees as a business expense and this rule applies even if you employ your own children. However, the Canada Revenue Agency has certain expectations regarding child labour. It’s important to ensure you understand and adhere to them.

Hiring Your Child

• In order to deduct wages you pay to your child as a business expense, you must pay your child — you should not claim this deduction if you don’t actually pay your child.
• Additionally, the work your child does must be necessary for earning business income. For example, your child needs to do something that supports your business — you cannot simply pay your child for household chores and claim it as a business expense.
• Finally, the salary must be reasonable and should be the same amount you would pay someone else to do the same job.

Paying With Product

You do not have to pay your child cash. Instead, you can pay him with product from your business.

If you pay your child with product, you should report the value of the product as a business expense.

If you pay your child with product from your business rather than cash, there are two things happening in your books, not just one. First, you're paying wages — you record a labour expense equal to the item's fair market value (say, $300 for a computer), and you record matching revenue for the deemed sale of that item. Second, because you're giving up actual inventory to make that sale, you also need to record the cost of goods sold and reduce your inventory — both at the item's cost to you, not its retail value (for example, if the computer cost you $200 to acquire). The wage expense and revenue entries cancel out for tax purposes, exactly as if you'd sold the computer for cash and paid your child in cash instead. The COGS/inventory entries reflect the normal cost of making any sale and would apply whether the computer was sold for cash or given to your child. Your child still must report the $300 fair market value as income on their own return.

Keeping Records

The CRA requires you to keep accurate and detailed business records.

If you employ your child, you need records of paying him. If you pay him by cheque, keep a copy of the cheque stub, and if you pay your child in cash, have him sign a receipt.

Issuing T4 Slips

If you employ your child, you must issue him a T4 slip as you would for any other employee.

Depending on the number of hours your child works and several other factors, you may need to withdraw Employment Insurance from his earnings. If you are unsure, the CRA can help you decide.

However, you do not need to deduct Canada Pension Plan contributions unless your child is over age 18.

References & Resources

• Service Canada: Employment Insurance – If you Work for an Employer Who is Related to You

Have questions? TurboTax can help with your return as well as offer expert year-round help with your corporate GST/HST questions and returns, and other bookkeeping and payroll help.