A sole proprietor in the 35% tax bracket pays her 16-year-old son a reasonable salary of $10,000 for services performed for the proprietorship. Compute the family's tax savings if the son has no other income, is claimed as a dependent on his parents' return, and takes a $6,100 standard deduction.

Question

Quizplus · Accepted Answer

The son's earned income of $10,000 will be taxed at his own rate, which is 0% for the first $6,100 and 10% for the remaining $3,900. This results in a tax liability of $390 for the son.
However, since the son is a dependent and has no other income, his standard deduction of $6,100 will reduce his taxable income to $0, resulting in no tax liability.
The proprietorship can deduct the $10,000 salary as an expense, reducing its taxable income by $10,000. At a 35% tax rate, this saves the family $3,500 in taxes. Therefore, the correct answer is A) $3,110, which is the tax savings after subtracting the son's tax liability of $390.

A Sole Proprietor in the 35% Tax Bracket Pays Her