Question

Jason and his wife Kara own all of the stock of Laurel, Inc. Kara is the president and Jason is the vice president. Kara and Jason are paid salaries of $400,000 and $250,000, respectively, each year. They consider the salaries to be reasonable based on a comparison of salaries paid for comparable positions in comparable companies. They project Laurel's taxable income for next year, before their salaries, to be $800,000. The decide to place their two teenage children on the payroll and to pay them salaries of $75,000 each to work about five hours per week for Laurel, Inc. a. What are Jason and Kara trying to achieve by hiring the children? b. If the IRS were to audit Laurel, Inc. do you think they would allow the children's salaries? If not, how would the IRS treat these payments?

Answer 1