She's standing there, hand outstretched. She needs money to go to the mall. Her allowance never goes far enough. So stop giving her one. Give her a job instead.

Parents who are sole proprietors — or in partnerships in which they are the only partners — can pay their minor children up to $5,450 in tax-free wages this year. The company deducts the wages as a business expense. The child pays no income tax on his or her earnings, so there's no withholding. Also, there's no Social Security, Medicare or other tax on these wages. If the child makes the maximum contribution to a traditional IRA, the combined tax-free/tax-deferred wage limit jumps to $10,450. For corporations, the child's wages are generally subject to the same payroll taxes as any other employee.

The rules are simple. First, add your child to payroll. Get an employer identification number if you don't already have one. You can do this easily online at http://www.irs.gov. Your child's status as an employee (as opposed to an independent contractor) is subject to the same rules as any other worker. You may not arbitrarily issue her a 1099. Be sure to file your quarterly and year-end payroll tax returns.

Make sure that the work is age-appropriate, and that the work is ordinary and necessary to your business. Even small children can help clean the office, answer phones, do simple filing, etc. The IRS has accepted deductions for wages paid to children as young as 7 under these circumstances.

Pay your child an appropriate wage for the tasks he or she performs — minimum wage at the very least. In fact, you can actually pay a little more. Remember that you don't have the expense of payroll taxes.

Your child must document the work he or she performs for you. Have the child maintain a daily log of his or her time and tasks. Keep the log with your child's time card.

Finally, pay your child with a check as you would any other employee. And issue a W2 at year-end. In some cases, the child might need to file a tax return. Consult your tax professional.

Also, there might be rules for your industry concerning the work that a minor can do. Check with your regulatory agency and your insurance carriers.

The tax advantages here are significant. As a parent/employer, wages paid to your minor child are deductible; allowances are not.

And your child's new job responsibilities will certainly cut into mall-time.

— Paula D. Williams, president and CEO of NumberCrunchers in Simi Valley, provides general accounting, payroll, financial reporting and taxation services. She can be reached at 527-8758.