April 2026
A Little-Known Way
to Pay Family and Save on Taxes
Many business owners overlook a powerful strategy that
allows them to pay family members, reduce taxes, and avoid payroll taxes
altogether.
You likely know the traditional approach: hire your child
and put them on payroll. That strategy works well for younger children in a
sole proprietorship. But once your child turns 18—or if you operate as a
corporation—payroll taxes usually apply.
In the right situation, a lesser-known alternative offers a
better outcome.
You can hire a family member for a “one-time project”
instead of ongoing work. This structure allows you to deduct the payment at
your higher tax rate while your family member reports the income at a much
lower rate—often with little or no tax liability.
For example, you might pay your college-age child to design
a website, create marketing materials, or complete a facility upgrade. If you
structure the work as a true one-time project—not a continuous or recurring
one—the income avoids employee status and thus payroll taxes for both you and
the child. It also avoids 1099 independent contractor status and thus
self-employment taxes for the child.
This approach can generate meaningful savings. In one
scenario, a $23,225 payment produced over $7,800 in net family tax savings.
To make this strategy work, you must follow several key
rules:
- Define
a clear, one-time project with a specific scope.
- Pay
a reasonable, fixed amount upon completion of the project.
- Avoid
hourly wages or ongoing tasks.
- Maintain
simple documentation and proof of completion.
- Ensure
the arrangement supports proper worker classification.
This strategy depends heavily on proper structure and
execution. If you treat the work as ongoing employment, you risk having your
child or other family member classified as an employee or a 1099 independent
contractor.
When done correctly, this approach efficiently shifts
income, minimizes taxes, and keeps compliance simple.
Do You Need a W-2
for Spouse-Employee 105-HRA Benefits?
If you employ your spouse in your business and use a Section
105-HRA to deduct family medical expenses, you may be wondering whether issuing
a W-2 is necessary.
The good news is, from a tax law standpoint: a W-2 is not
required. IRS guidance and court decisions confirm that medical reimbursements
under a properly structured Section 105-HRA can qualify as reasonable
compensation—even if they are the only form of pay and are not reported as
wages.
So why do some business owners still issue a W-2?
The answer lies in trade-offs:
- Tax
impact. Adding W-2 wages generally does not produce meaningful tax
savings. In many cases, it slightly increases overall tax liabilities due
to interactions between self-employment taxes and income taxes.
- Administrative
burden. Issuing a W-2 means running payroll, including quarterly
filings, year-end reporting, and ongoing compliance. This creates
additional time and cost burdens as well as the potential for penalties.
- Audit
perception. A no-wage setup (large benefits, zero wages) is
technically valid but may appear unusual. Adding a salary makes the
arrangement look more conventional and may reduce IRS scrutiny.
Bottom line. This decision is not about saving
taxes—it’s about choosing between simplicity and optics. Skipping the W-2 keeps
things lean and compliant, while adding it may provide peace of mind at the
cost of added complexity.
Lawyer Burned by
Fake AI Tax Cases—Don’t Be Next
Artificial intelligence (AI) is all the rage today. AI tools
like ChatGPT, Claude, Grok, and Perplexity are being used for everything,
including legal research. But beware! AI is not perfect. It’s not even
intelligent.
AI doesn’t think like a human, and it has no internal
fact-checker. It produces new content by analyzing vast amounts of prior works
(“training data”) to identify underlying patterns and structures. It then makes
probabilistic predictions about the next word in its answer. In short, it
predicts words, not truth.
And AI frequently lies—AI developers call this
“hallucinating.” One survey of general-purpose AI tools found that they
hallucinate 58 percent to 82 percent of the time on legal queries. What about
AI tools specially designed for legal research? These tools are more reliable,
but they still hallucinate 17 percent to 34 percent of the time.
One attorney found this out the hard way when he apparently
relied on AI to perform legal research. He ended up submitting a brief in Tax
Court that contained fake and inaccurate legal citations. The Tax Court was not
amused. He lost his case. This was a first for the Tax Court, but other courts
have fined attorneys who submitted fake legal research generated by AI.
Tax questions are particularly difficult for AI to answer
correctly because tax law is complex and constantly changing. If you use AI for
research, always instruct it to provide a citation to primary authority for
every legal claim, and check that reference yourself.
Many courts are now requiring attorneys to disclose whether
they used AI in court filings and to certify that a human has independently
reviewed any AI-generated document.
The IRS has recently advised its employees to avoid
becoming overly reliant on AI tools. It says they should use those tools to
assist and augment their work, not replace their own critical thinking and
judgment. This is good advice for everyone.
HSAs After Death:
What You Need to Know
Health Savings Accounts (HSAs) are a great way to save
money.
Unlike any other tax-advantaged account, they provide a
triple tax benefit:
- Contributions
are tax-deductible.
- Monies
inside the HSA grow tax-free.
- Withdrawals
are tax-free if used for medical expenses.
Withdrawals after age 65, if not used for medical expenses,
are subject to regular income taxes.
Some wealth advisors counsel HSA owners to treat their
accounts like a super IRA—to maximize their contributions and make few or no
withdrawals for medical expenses. By the time they retire, they could have a
substantial amount saved in their accounts. They can withdraw the money
tax-free to pay medical expenses, or withdraw it for non-medical expenses and
pay regular income tax.
But HSA owners need to understand that after they die, the
tax code treats HSAs very differently from IRAs or 401(k)s.
If your spouse is your HSA beneficiary (as is normally the
case for married people), the account will automatically go to your spouse upon
your death, with no taxes due. Your HSA becomes your surviving spouse’s HSA.
If you don’t have a spouse as your beneficiary, your HSA
automatically ends on the date you die.
Your non-spouse beneficiary—whether a child or someone
else—will receive the funds and have to pay regular income tax on them that
year. This is very different from the tax treatment for inherited IRAs or
regular 401(k)s; non-spouse IRA and 401(k) beneficiaries have 10 years to
withdraw all the money from the account and pay tax on it.
Sooner or later, every HSA will have a non-spouse
beneficiary, whether because the HSA’s owner never married, they got divorced,
or their spouse predeceased them. The HSA is generally not the best vehicle for
passing your wealth to the next generation.
If someone other than your spouse is your HSA beneficiary,
you can reduce the tax hit they’ll face when you die by making tax-free
withdrawals from your account to reimburse yourself for past medical bills you
paid. These include not just doctor bills but also dentist bills, vision care,
and many other expenses.
It doesn’t matter how old these bills are as long as you
paid them after you established your HSA and didn’t deduct them on your taxes.
However, you must have proper documentation for them. You can take such
reimbursements anytime, but it is definitely something to consider if you
become seriously ill and don’t expect to live much longer.
All HSA owners should get in the habit of keeping
receipts for their medical expenses. There are HSA expense-tracking apps that
can make it relatively easy to maintain this documentation.
Don’t Make This
Costly Portability Election Mistake
The One Big Beautiful Bill Act (OBBBA) permanently increased
the federal estate and gift tax exemption to a whopping $15 million per person
for 2026 and later. You can give away while alive and/or bequeath at death this
much money or property free of federal estate and gift tax.
If you’re married, you and your spouse each get a $15
million exemption. Thus, your combined estate and gift tax exemption is $30
million for 2026 (it’s adjusted for inflation each year).
But married couples don’t automatically get the combined
exemption of up to $30 million. Rather, when one spouse dies, the executor of
their estate must file an estate tax return, even if it isn’t otherwise
required, and make a “portability election”—that is, they must direct the IRS
to “port” (transfer) the deceased spouse’s unused exemption to the living
spouse.
A recent Tax Court case shows that making a portability
election can be fraught with risk.
To make filing an estate tax return solely to elect
portability as simple as possible, the IRS allows the executor to use a
simplified reporting procedure and provide a single estimate of the entire
estate’s value instead of providing fair market values of all the estate’s
assets.
Key point. The executor can use simplified reporting
only if the entire estate is left to the surviving spouse and/or to charity.
The Tax Court (in Estate of Rowland) recently held
that the executor improperly used simplified reporting where a deceased spouse
left property in trust to grandchildren. As a result, the court disallowed the
executor’s portability election, and the surviving spouse lost the deceased
spouse’s $3.7 million unused estate tax exemption, resulting in $1.5 million in
extra estate tax due when the surviving spouse died.
This case is a wake-up call to all married couples and their
estate planners. Portability offers the simplest planning strategy to maximize
the couple’s combined exclusion amount. But the executor of the deceased
spouse’s estate must follow the proper reporting procedures to make a valid
portability election.
Executor instructions for a portability election are now
especially important after Rowland, to ensure that portability is not
lost entirely due to inadequate estate return preparation.