Can I set up an LLC to employ my wife for high frequency day trading activities?

Thanks for the response. Does this strategy actually work though? I've heard the "trader tax status" is super hard to qualify for with the IRS. Wouldn't they just see this as trying to convert investment activity into business income?

You're absolutely right to be concerned about trader tax status. The IRS has very specific requirements for qualifying as a "trader" versus an "investor" - including trading frequency, daily activity, seeking profit from short-term market swings rather than dividends/appreciation, and substantial time commitment. Even with 10 trades daily, the IRS might still consider this investment activity rather than a trading business. They look at the whole picture, including whether you're truly trying to capitalize on short-term market movements or just actively managing investments.

How does their service actually work? Do they just give general advice or do they help with the specific paperwork for setting up the LLC and everything?

I'm skeptical about online tax services for something this specialized. Did they actually help with trader tax status issues or just general LLC formation advice? Seems like you'd need a specialized accountant for this.

They analyze your specific situation rather than just providing generic advice. They assessed my trading patterns, frequency, holding periods, and overall strategy to determine if I'd qualify for trader tax status with the IRS. Then they provided documentation explaining how my specific trading activity would likely be classified. For the LLC and business structure questions, they reviewed multiple options based on my specific circumstances - including potential issues with having my spouse as an employee. They don't handle the actual LLC formation paperwork, but they guided me on what structure would work best given my trading patterns and goals.

Wait, there's a service that actually gets you through to the IRS? How much does it cost? The last time I called about my business I waited over 2 hours and then got disconnected.

This sounds like BS honestly. I've never heard of any service that can actually get you through to the IRS faster. And even if you do get through, random IRS phone agents aren't authorized to give binding rulings on complex tax situations like trader status.

They don't charge for connecting you - you pay only if they successfully get you through to an agent. I don't remember the exact cost, but it was reasonable considering the hours of hold time it saved. Their system navigates the IRS phone tree and waits on hold for you, then calls you when an agent is on the line. You're right that phone agents can't give official rulings on complex matters. However, they provided general guidance on their evaluation criteria for trading businesses and pointed me to specific IRS publications that addressed my situation. This general information was still extremely valuable in understanding how the IRS approaches these cases, even if it wasn't a binding determination on my specific situation.

Thanks for sharing your experience! How did you determine what "reasonable compensation" should be for this kind of trading work? And did you have any issues proving this was a legitimate business to the IRS?

We researched what professional traders with similar experience and trading volume earn in the marketplace. We documented this research and kept it with our business records. We settled on a figure that represented about 70% of our profits as direct compensation, which aligned with industry norms for similar trading operations. As for proving business legitimacy, we've been audited once and successfully defended our structure. The key was having comprehensive documentation: a formal business plan, daily trading logs, time sheets tracking hours spent analyzing and executing trades, separate business bank accounts, and formal board meeting minutes discussing trading strategy. Additionally, we never commingle personal investment activities with the business trading operations.

Exactly this. I got audited last year over exactly this issue despite having documentation for over 800 trades. They determined I was still just an "active investor" not a "trader" because some of my holding periods were longer than a few days. Cost me thousands in back taxes and penalties.

This is really helpful information, thank you! Based on my wife's current trading patterns, we definitely meet the trades per year and holding period requirements (most trades are same-day), but documenting the hours spent might be tricky. Would you recommend using specific software to track this kind of activity?