Single menber LLc Company, Working for free?

Question

My mother has a LLc single member company, Im helping her with her business everyday, I don't get any payment for that, so its advisable that my mother include me like her employee, Could her business have any problem if IRS find out that she has an employee and she doesn't declare me like that because I'm working for free? What will be the advantage if she declare me how employee ? Could she deduce more taxes if declares me employee?

Thank you in advance.

Answer 1

Great question! First, I know of no reason for the IRS to be upset that you are working for your mother for free. There could be an issue with her employing someone for less than the minimum wage, but I don't think that applies to LLCs who employ their children.

However, you both may be unwittingly causing the family to overpay in taxes! Why? First of all, if you are under 18 (and you are working for an unincorporated family business), you are exempt from paying Social Security / Medicare tax. If you are under 21, you don't have to pay FUTA tax.

Second, regardless how old you are, the first so many thousands of income is federally tax free to you. If you are claimed by your parents, that amount in 2007 is $5350. If you are claiming yourself, that amount rises to at least $8750. Not only is that money federal tax free to you, but your mother could be writing it off. If you have children of your own, you may even qualify for credits which means you get money from the IRS even if you had nothing withheld.

So, right there, by not paying you, you are losing tax savings. Remember, whatever she pays you in income and FICA taxes, she gets to write-off from her profits. That means, she saves federal taxes and FICA taxes. If she is in the 25% tax bracket, when you consider FICA taxes, she saves around $400 for every $1000 she pays you. Had she given you $5000 in 2007, she would have saved $2000 in taxes. She saves more if she is in a higher tax bracket. The savings may be greater when you factor in state taxes, but each state is different, so I can't comment further.

The mere fact that you are probably in a lower tax bracket means even if you don't consider your standard deductions or FICA situation, the family is losing out.

As if all that weren't enough, you could be putting money away for retirement if you had income. You could shelter up to $4,000 of into a Traditional IRA in 2007. So, if you claim yourself (and are not married or have dependents); the first $12,750 your mother pays you is federal tax free. You pocket $8,750 and you put $4,000 into your traditional IRA. No federal taxes at all!

Of course, you could also put money into a Roth IRA (which I would recommend if you don't need the write-off), but it won't lower your taxable income.

Please consider all the ramifications first, but in general, paying children to work in the family business is not only a good learning experience for everyone (parent learns how to pay employees using a W-2; child gets a paycheck and learns how to do his/her tax return and learns about saving for retirement), it can also save the family lots of money in taxes.

Answer 2

Tax wise she would have to pay into Social Security on your behalf but it would be better if she just pays you cash. The paper work and taking out taxes and paying in quarterly is a real hassle for just one employee. Anyway if you are working for free, she has a good deal going. The IRS does not care if someone wants to work for free. No to the answer could she deduct more money unless you were making a large salary but it doesn't sound to me like you are.

Answer 3

She doesn't get to deduct any more taxes if she declares you an employee if she doesn't pay you anything. What she gets is free help, and you get experience with the business world. As long as you both are happy with that arrangement there's no need to change it. There'll be no trouble with the irs if she doesn't declare you because she's not paying you.

Answer 4

If you aren't getting paid, then you are not an employee, you are a volunteer.

If she declares you an employee and starts paying you, then yes she can deduct your wages. She will have a number of requirements to meet if she does not currently have employees and then has one or more - these include paperwork, withholding, reporting.

Answer 5

i think she should definitely pay you as a tax benefit.