Question

A father (a Schedule C independent contractor) hires his 14 year old son for a summer job as a receptionist. The father pays the son $100 per hour. The father paid the previous receptionist (also a 14 year old male, but unrelated to the father) $10 per hour.

Can the father deduct $100 per hour on his Schedule C? Does the son have $100 of Gross Income per hour?

Answer 1

The father may not deduct the full $100 per hour on his Schedule C because it is significantly higher than the standard wage and may be seen as unreasonable by the IRS. The son must report the $100 per hour as gross income on his tax return.

Step-by-step explanation:

When considering the scenario where a father hires his son as a receptionist and pays him $100 per hour, while previously an unrelated receptionist was paid $10 per hour, there are implications for both income tax deductions and gross income recognition.

The father's ability to deduct payments on his Schedule C as a business expense will likely be scrutinized by the IRS. The $100 per hour wage is significantly higher than the market rate and could be seen as unreasonable compensation. The IRS would likely not allow a deduction for the amount that exceeds a reasonable wage for the services provided. Thus, the father may not be able to fully deduct the $100 per hour payment to his son.

As for the son, regardless of the wage rate, the money he earns from working is considered gross income. Even though $100 per hour is well above the usual rate of pay for a receptionist, particularly for one who is 14 years old, he must report this as income on his tax return. The son has $100 of Gross Income per hour that he works, which is subject to tax reporting and compliance issues.