Q&A: Should I Pay My Daughter by W-2 or 1099?

Question from a Cleveland small business owner: How do I pay my daughter?
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?

W-2 Payment is Important When Paying Your Daughter

Answer: Yes. And W-2 payment is essential. If you pay her on a 1099, she will be required to 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 Ohio, as in most states, you also don’t pay any unemployment taxes.

Tax tip for small business owners registered as an LLC, limited liability company: 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.

For background on this rule, see IRS Now Says No Payroll Taxes on Family Employment in a Single-Member LLC.

In this case, your daughter also pays no income tax. Your daughter has a $12,950 standard deduction. This means she also pays zero tax on earned income up to that amount.

Small Business Owner: Schedule C Taxpayer

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:

Having your Cleveland area small business, or proprietorship, pay your daughter on a W-2 makes this work.

Small Business Owners: Corporation

If you operate your Cleveland small business as a corporation, you would still get the tax benefits of being able to deduct the $12,000 and your daughter would still be free of taxes. However, you do not get the results of #3. But it’s still a good deal.