Q&A: Paying My Daughter: W-2 or 1099?

Question

I will hire my 15-year-old daughter to work in my single-member LLC business, and I expect to pay her about $12,000 this year. Do I pay her through payroll checks and file a W-2?

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Answer

Yes. And W-2 payment is essential. If you pay her on a 1099, she will pay self-employment taxes.

When you pay her on a W-2, neither you nor your daughter pays any Social Security or Medicare taxes, and in most states, you also don’t pay any unemployment taxes.

Key point. Your single-member LLC is a “disregarded entity” for federal tax purposes. It’s taxed as a sole proprietorship (unless you elect corporate treatment). In this instance, you are the child’s parent, enabling “no Social Security or Medicare taxes” for both your child and your proprietorship.

Key point. Your daughter has a $12,950 standard deduction. This means she also pays zero tax on earned income up to that amount.

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Takeaways

As a Schedule C taxpayer, your $12,000 payment to your daughter for her work in your single-member LLC produces the following three excellent results:

You deduct the $12,000.

Your daughter receives the $12,000 free of taxes.

Neither you nor your daughter pays any Social Security or Medicare taxes.

Having your proprietorship pay your daughter on a W-2 makes this work.

Key point. If you operated as a corporation, you would get excellent results 1 and 2, but not 3. But it’s still a good deal.