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RAILhead · Dec 7, 2008, 10:27 AM

I've been doing some research -- trying to, at least -- regarding how much I can pay a family member to work for me. I'll be calling my accountant tomorrow, but I wanted to get info now.

Unfortunately, I'm unable to find ANYTHING about this. I have a feeling that if I pay a family member $200,000 a year to handle slight paperwork, etc., the IRS will red-flag it and want me to justify what's up. What I can't find, though, is what amount will raise suspicion -- or if there are any Federal limits already established. If I pay too much, the IRS will see it as an attempt to circumvent gift and estate taxes, so I want to find that fine line and get as close as I can.

Can anyone else find info on this? I'm totally sucking at teh intarnets with this one...

TIA,
Maury

Maflynn · Dec 7, 2008, 10:32 AM

If he's (or she) is an employee and your paying the taxes and reporting all of the income, I cannot see why there would be a limit on compensation,

Spheric Harlot · Dec 7, 2008, 10:56 AM

Originally Posted by RAILhead

Unfortunately, I'm unable to find ANYTHING about this. I have a feeling that if I pay a family member $200,000 a year to handle slight paperwork, etc., the IRS will red-flag it and want me to justify what's up.

Why should they?

As long as you'd be providing the legally required benefits, it's taxable income just like anybody else's.

You're not "gifting" anything.

The only possible situation where I could imagine a difference arising is if, by paying, say, your wife a salary, your "loss" of profit means you drop into a different tax bracket, while your wife may move up in the tax progression, but still pay less in taxes than you would have.

I don't know how that works in the U.S. (nor, precisely, in Germany, either).

RAILhead · Dec 7, 2008, 11:01 AM

Yes, I see why they *shouldn't* have a problem, but earlier, brief discussions on the matter resulted in "warnings" about not paying too much. Something along the lines of me having to pay a family member the same I would pay an average Joe off the street for doing the same task. So, if the job entails nothing more than making sure bills are paid and takes up only 5 hours a week, the IRS would frown on me reporting I paid that family member a salary of $200,000 per year.

Big Mac · Dec 7, 2008, 11:07 AM

Can I be an honorary member of your family, RAILhead?

If a rich person wants to pay a family member $1,000,000 a year for doing nothing in particular, as long as all taxes are paid I don't think anyone will object.

Cold Warrior · Dec 7, 2008, 11:15 AM

Certain family member employees give you (if you are the sole employer not in a 50/50 partnership) tax advantages, e.g., children under 18/21 don't need to have FICA/FUTA, respectively.

That has advantages because someone employing a number of their children could pay them high salaries and reap significant savings by reducing business income possibly into a lower bracket and reducing FICA taxes that the business won't have to pay on the employee's behalf. Anyone who has worked for their parents' business and seen the books knows that mom and dad shell out a huge amount each month on FICA taxes.

The problem is that the IRS expects it to be real work with a reasonable salary. I imagine that part would have to be defensible and they'd probably make some regional comparisons if you got tagged for an audit. I'd expect a paper-shuffling admin job (secretarial) to attract attention if that person was being paid $200k. Something like that might also raise money laundering red flags -- not what you're doing but certainly more trouble than it's worth.

But you're on the right track by choosing to consult an accountant.

RAILhead · Dec 7, 2008, 01:36 PM

We're basically going to live off the family estate now, and we're reducing the estate total before the idiot Death Tax rapes our family of 45% of the family's hard-earned money. We're wanting to pay the children to work at one of the family corporations, doing paperwork, handling purchases, balancing books, etc., and we want to pay them enough to help supplant a high-paid, salaried, 40-50 hour "regular" job.

Phileas · Dec 7, 2008, 01:56 PM

It's all in the wording and naming. While the IRS will question 200k salary for menial work, they won't if you call it consultancy.

mindwaves · Dec 7, 2008, 03:30 PM

So after death and with the proper paperwork, you can reduce the estate total after the death? I thought that the estate total was totaled at the time of death?

RAILhead · Dec 7, 2008, 04:43 PM

No one is dead. We're living on the estate now.

mindwaves · Dec 7, 2008, 05:27 PM

I see. Thanks.

The Godfather · Dec 7, 2008, 06:18 PM

Where do I send my resume? I'll do twice the work, for half the pay, I'll even be professional.

E's Lil Theorem · Dec 8, 2008, 06:41 PM

I don't think the IRS would have anything to say in this matter. However, if you were running a business with family members and outside folk, then it would be make business sense for you to pay them based on job duties and individual performance. As you've explain it, you have a job that you only trust a family member to perform and you are willing to pay X amount for it.