I process payroll for a living and one of my clients is a law firm.
The three partners are officially paid a salary of $17,769 per annum, but award each other $525,000+ bonuses.
Can they get away with that? I assume they can, considering that they’re lawyers, but they all seem to be complete scatterbrains.
How do you know they do not report taxes on the bonuses?
I process their payroll.
So, how do you know they don’t report taxes on the bonuses?
BrianS, are you saying that
And if you do the payroll, why don’t you do either of these two things?
Hmm. You have a good point now that I think about it. I don’t really know, it was just an assumption
I just assumed that they were doing that to avoid paying taxes (or paying substantially less in taxes) on the bulk of their income. Why else would they do it? In 20+ years of processing payrolls for just about every type and size organization you can imagine, this is the first time I’ve ever seen anything like this.
Anyone care to enlighten me?
Well, I can only speak to my own situation, but my annual bonus and the monthly cash award I get are both subject to withholding and are reported as income. I have no reason to believe that the bonuses of attorneys are treated any differently. Were I in your position, I would be worried that as the person who processes the payroll it would be seen as my responsibility that those bonuses were not reported. $1.5 million in tax fraud per year equals serious potential jail time. I’d have a talk with the partners and demand that they clarify exactly under what interpretation of tax law they are operating in their belief that these bonuses are not taxable income.
I own my own business. Nobody withholds taxes from me, either.
It doesn’t mean I don’t have to pay them.
Bonus checks do not have to have payroll deductions done on them…they could issue themselves a 1099 at the end of the year showing all bonuses received, and then have to claim that on their tax return.
The big difference is Social Security. Bonus checks shouls have a 28% deduction on them when issued. But there are no other taxes (SUI, FUI, Social Security, Workers Comp… etc) withheld.
Another possibility, which my come from some point in their corporate history, is that they prefer the option to link pay to some rough idea of billable hours, rather than straight salary. A partner is a co-owner of a law firm, and I’ve known more than a few who drew hefty salaries (in addition to a share in the profits) while effectively semi-retired. At least I assume they weren’t making many important contacts or racking up many billable hours on that six months sailing Polynesia, or the year they spent on a commission in their now-independent ancestral homeland. Partner compensation is often a cause for grumbling, but especially in smaller firms it may not seem worth a boardroom fight.
As long as all three are pretty active full-time in the business, they’d probably take the same bonus, rather than hassling the details If one of them wasn’t active (which might well have been anticipated early on, e.g. maternity leave or a personal dream of climbing Everest), s/he might not get the same bonus that year. It’s a lot easier and less legally problematic to adjust an annual bonus on the basis of performance that year than it is to mess with their salary, especially after the fact.
There may also be other considerations, like contingency planning for the possibility of divorce of one of the partners. A half million dollar salary is easy game for alimony; bonuses and other nonfixed compensation are easier to manipulate. If you’ve always received 99% of your income in performance bonuses -“and gosh darn, I just haven’t been able to keep my mind on my work since the divorce” or “I’ve decided to devote my time to personal growth and exploration” then you’re in a better position to -forgive me- “play lawyerly games”. If you always made 500K+ in salary, any ‘alternative compensation arrangements’ you make later will be too obviously a transparent scam.
“Payroll” may be the primary income modality for the lower and middle classes, but the higher you get, the less important it is. Since ‘other compensation’ doesn’t get much handling in primary payroll processing, you might not see or notice the full scope of their use.