A: Your accountant is correct in asserting that you are free to your daughter for the work she does in your business, says CPA Danielle M. Hewitt. And you are also free to pay her taxes, which will likely be calculated at the 10% rate, rather than 15%, if she has no other income, notes Hewitt.
You must remember, however, that if she gets a Form 1099-Misc, your daughter will have to pay self-employment tax at about 14%, as well as state income tax. Information on how to treat compensation paid to independent contractors can be found at the Internal Revenue Service's Web site.
WEIGHING IT UP. If you wind up covering all your daughter's tax liability, will the benefit to your business really be worthwhile? The compensation that you pay your daughter must be at a reasonable rate for the work performed, so you would have to look into what the going rate would be if you were to hire someone from outside the family to do the work for you.
Figure out whether your business would truly benefit if you paid your daughter, and then go ahead with the plan only if the numbers look good in the long run. And one last caution: Don't forget to figure in the time you will need to complete the extra paperwork involved!
Have a question about your business? Ask our small-business experts. Send us an e-mail at firstname.lastname@example.org, or write to Smart Answers, BW Online, 45th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally. Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.