A sole proprietor in the 37% tax bracket pays her 16-year-old son a reasonable salary of $14,000 for services performed for the proprietorship. Compute the family's income tax savings if the son has no other income and takes a $12,400 standard deduction.

Question

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The son's taxable income is $1,600 ($14,000 salary - $12,400 standard deduction). The tax on $1,600 at the 10% rate is $160. The sole proprietor saves $5,180 in taxes ($14,000 x 37%). The family's net tax savings is $5,020 ($5,180 - $160).

A Sole Proprietor in the 37% Tax Bracket Pays Her