A business owner hired his 15-year-old daughter to work in his single-member LLC business.  She is expected to be paid about $12,000 for the year.  What are the benefits of paying her on a W-2

A single-member LLC is a “disregarded entity” for federal tax purposes.  It is taxed as a sole proprietorship unless corporate treatment is elected.  The W-2 payment for the owner’s child is essential.  If the daughter was paid on 1099, she will pay self-employment taxes.

When the daughter is paid on a W-2, neither the owner nor the daughter pays any Social Security or Medicare taxes, and in most states, there is also no need to pay any unemployment taxes.  The daughter also has a $12,950 standard deduction, which means she also pays zero tax on earned income up to this amount.

As a Schedule C taxpayer, the business owner’s $12,000 payment to his daughter for her work in the single-member LLC produces the following results:

Most types of Section 1250 property, including land improvements, do not qualify for the Section 179 deduction.  Section 179 expensing may be used to deduct interior improvements to non-residential real property.

In comparison, bonus depreciation may be used to deduct land improvements with a 15-year class life.  Improvements may include sidewalks, fences, driveways, landscaping, and swimming pools.

  1. The business owner deducts the $12,000.
  2. The daughter receives the $12,000 tax-free.
  3. Neither the business owner nor the daughter pays any Social Security or Medicare taxes

This works by having the proprietorship pay the daughter on a W-2.  Results 1 and 2 may also work when the business is operated as a corporation, but not 3.  It is, however, still a good idea.

To make this strategy audit proof the amount paid to the child must be reasonable for the actual work performed.

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