Accountants: Is it illegal to be on a company payroll if you dont work there?

[FoBoT]

a company can pay anybody for 'consulting'
it could consist of just having an email account, as long as the person answers an email 'question' each year, they 'consulted'

many family businesses do this, pay family members like that as a way to take care of their own

 

[SlitheryDee]

A company does not pay tax on wages paid out (aside from payroll taxes for SS and Medicare), so it is a deduction (at least in the US) in a manner of speaking. However, a deduction is not a 1:1 tax break. All they do is reduce the company's net income. In the US that means that a company only sees, at most, a tax reduction of $0.35 for every $1.00 of wages paid out. Paying money out in wages to reduce the company's tax load just doesn't make a lot of fiscal sense because you pay more in wages than you save in taxes.

ZV

Yeah. I didn't mention this because I don't know a lot about taxes, but that never made sense to me either. What difference does it make to save a bit on taxes when it's just a percentage of a larger amount that you're paying to someone else? You end up with more money by just opting not to pay the wage in the first place.

 

[DrPizza]

A company does not pay tax on wages paid out (aside from payroll taxes for SS and Medicare), so it is a deduction (at least in the US) in a manner of speaking. However, a deduction is not a 1:1 tax break. All they do is reduce the company's net income. In the US that means that a company only sees, at most, a tax reduction of $0.35 for every $1.00 of wages paid out. Paying money out in wages to reduce the company's tax load just doesn't make a lot of fiscal sense because you pay more in wages than you save in taxes.

ZV

In some cases, it makes sense. Suppose as the sole owner of a business that you have kids about to go to college. "Hiring" the kids and using that money to pay their tuition might result in less of a tax burden than paying yourself with the profits then paying their tuition. i.e., instead of taking a 60k salary, take a 50k salary and pay your kid 10k.

*note - I'm not sure how legal this is; just that it makes sense financially, I am not an accountant. (Though I do know a business owner who did this. However, in that case, he was somewhat of a workaholic and his kids were on the schedule to work - he worked their hours.)

 

[Slew Foot]

I know for a fact that it's illegal where you're from in Australia.

This is legal in the US though Im not sure about Canada where the OP is from. In fact my accountant encouraged me to put my kids and other family members on my corporations payroll as they would be in a lower tax bracket than myself.

 

[Jeffg010]

a company can pay anybody for 'consulting'
it could consist of just having an email account, as long as the person answers an email 'question' each year, they 'consulted'

many family businesses do this, pay family members like that as a way to take care of their own

Ya I like this idea. If you had stay home wife raising kids instead of her nagging you for money all the time you can put her on as a consultant get low taxes and she still get the money.

 

[mugs]

That's an amazingly draconian law.

Government allows you to deduct business expenses from business income for tax purposes.
Limits deductions to ACTUAL business expenses.
Draconian.

Yeah... not seeing it.

 

[Mike Gayner]

I think we might be talking about different things.

I think you're talking about business expences or some shit. I'm talking exclusively about paying someone a salary to do nothing. Usually paying a family member the max tax-free salary. Which here is 6k.

I can just say I'm paying my kid 6k a year, to wash my car every month.

Or once a year. Or whatever.

I dont see how the gov can tell me what I must pay people to do certain shit. If I want to pay some guy 500k a year to follow me around laughing at my jokes, how can is that tax fraud?

It's tax avoidance - paying a non-commercial salary to exploit your kid's tax-free threshold while gaining a deduction for the company. It's a contrivance and it's done without commercial purpose.

 

[MtnMan]

Many people collect a paycheck without doing a damn thing to earn it.

 

[Cal166]

Many people collect a paycheck without doing a damn thing to earn it.

You mean a Welfare check?

 

[krunchykrome]

It's his company, he can do whatever he wants. He can say she's a "consultant" and that would be the end of the discussion.

 

[JimKiler]

I have an accounting degree but I doubt this is illegal. A company can spend money how they see fit for the most part. There cannot be anything against a company giving someone money so having someone on the payroll cannot be an issue. There are IRS implications in how it is done for both sides.

 

[DaTT]

Thanks for the answers. It makes much more sense to me now as to why is it against the law. Although, it seems there are many "loop holes" around this.

 

[BrokenVisage]

Worked for Milton, and he never got thrown in a FPMITAP.

 

[D1gger]

I have run into this situation in Canada. When I first joined the company I now run, the bosses wife was on payroll and did nothing, he simply wanted to have her on the payroll. They had some grief from Employment Insurance branch, as while he wanted to pay her, he didn't want to have to submit EI premiums to the government.

Our accountant convinced Canada Revenue Agency that she did perform some services for the company, that would not have been done by a regular employee, such as reviewing supplier invoices to ensure that there was no improper payments being made and she was deemed to be an employee who was exempt from EI, therefore no premiums were to be paid. It was a sticky situation, but they bought it.

As far as working for the company and not doing anything, it didn't seem like that was their issue, they simply thought she should be paying EI as well as regular income tax on the earnings.

 

[JimKiler]

Government allows you to deduct business expenses from business income for tax purposes.
Limits deductions to ACTUAL business expenses.
Draconian.

Yeah... not seeing it.

Agreed, specially considering as a non business we have to pay tax on all our income without any deductions for expenses. I need a car for my kids and a house to provide shelter but I do not get an IRS deduction like a business for either of these items.

 

[lord_emperor]

For $5200/yr no agency is going to care enough to pursue it, legal or no.

 

[PimpJuice]

Nobody cares what the law is in NZ or Australia......those are shitty countries full of imbeciles.

 

[sourceninja]

For $5200/yr no agency is going to care enough to pursue it, legal or no.

Why not, the IRS recently audited me for thousands less.

 

[SaDiZTiKStyLeZ]

$100/week is enough for her to keep quiet about him touching her in the no-no place as a child? What a dumb kid.

 

[Ns1]

"consultancy fees"

 

[DaTT]

For $5200/yr no agency is going to care enough to pursue it, legal or no.

The question wasn't really about the amount of money, just the legality of the situation. I just threw the amount in because I knew it.

 

[ElFenix]

every small business owner i've ever met has done this, put the kids on the payroll for nominal (at best) work. and yes, it's to avoid taxes. pretty sure it's not legal in the US.

 

[EagleKeeper]

every small business owner i've ever met has done this, put the kids on the payroll for nominal (at best) work. and yes, it's to avoid taxes. pretty sure it's not legal in the US.

It shifts the tax burden from a higher bracket to a lower bracket.

Example:

I can pay each of my two grandkids $5K / year to mow the lawn and shovel the snow for the home office.

Just because I would pay a lawn service $1000/yr to do it, does not mean that I can not pay the kids instead
They will have to pay taxes on the $5K, but that would be much less than I would pay

30% is much greater than 7%

 

[Glitchny]

In some cases, it makes sense. Suppose as the sole owner of a business that you have kids about to go to college. "Hiring" the kids and using that money to pay their tuition might result in less of a tax burden than paying yourself with the profits then paying their tuition. i.e., instead of taking a 60k salary, take a 50k salary and pay your kid 10k.

*note - I'm not sure how legal this is; just that it makes sense financially, I am not an accountant. (Though I do know a business owner who did this. However, in that case, he was somewhat of a workaholic and his kids were on the schedule to work - he worked their hours.)

This is pretty much exactly what happened with my family. While I was at college I was officially "janitorial services", or some such for my dads office. At one point was tech-support (which I actually did). I was fired before he had to start giving me too much retirement money.

 

[brulle]

What if the company has three partners and and two of the partners have their wives on the payroll with the accountant aware but the third partner unaware