What is a Bona fide employment relationship?
A bona fide employment relationship is a genuine, IRS-recognized arrangement in which an employer hires a worker to perform real, necessary business tasks in exchange for reasonable compensation. For family businesses, this concept is central to the Hiring kids strategy, where parents must demonstrate that children perform legitimate work, receive market-rate wages, and are treated as actual employees with timesheets, payroll records, and Form W-2s. Without a bona fide relationship, the IRS may reclassify wage payments as nondeductible gifts, disallowing the business deduction and triggering potential penalties.
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