I’m not familiar with what the IRS would allow for business expenses, but Japanese tax authorities probably wouldn’t accept it as a legitimate expense unless a legitimate purpose could be shown. If the girlfriend were a top notch attorney, then it would seem OK, but if she’s not, then what is he paying her for?
It not that the tax authorities question all business decisions, but it seems like he is trying to get around his personal income by giving some to his girlfriend. They may not like that, which is why the previous accountant didn’t really want to do it.
I think we’re using different deficitions for the word “contractor.”
My definition applies to individuals, people who normally file a Schedule C in their taxes. At one time these were called freelancers, but the meaning has expanded and now takes in pretty much everybody who is not an employee of the firm but comes in to work a specific task at an hourly wage. There are exceptions to all this, and there have been many lawsuits concerning people who work regular schedules but are treated as contractors so as to earn no benefits, but let’s use that at a general statement. Conrtractors can include lawyers, accountants, programmers, writers, plumbers, caterers, and a thousand other jobs.
You’re using contractors in another sense, the older one of firms that contract to do business with government. Executives at these firms may have salaries that are bound by federal regulations, just as much of what they do are bound by federal regulations. But this is a totally different category of jobs from the individual contractor above.
In neither case is there a general maximum salary. Your USA Today link notes that the firms can “pay their executives and other employees as much as they want to with funds that don’t come from federal taxpayers.” The limit for paying executives with federal funds is just a special case of all wage guidelines, in which firms can set up classifications with maximums. Those are internal matters, though, not a state-wide or country-wide maximum for all classes of employees in the way that minimum wage laws cover all firms and are not internal. (And yes, there are exceptions to the minimum wage laws too, but that’s irrelevant to this general principle.)
IRS is unlikely to question the salary on the girlfriend’s return - they don’t know whether that 550 is for an hour, or for 3 days. As long as it’s being handled correctly with withholding etc. and the IRS gets its share, they probably won’t even look at it.
From an audit standpoint, it’s conceivable that this might be out of the norm (sudden change in income or whatever) that it might trip some audit flags - but again, if the “employer” is taking out taxes and remitting them, I doubt they’d notice.
On the employer’s side: if the company ever gets audited this could raise some big flags. I don’t know a lot about corporate taxes but this may be seen as an inappropriate way of evading taxes. It may also impact the company’s 401(k) plan (if there is one), what with all the rules about highly compensated employees.
I assume this is an accountant related to a small business? In that case, I think it’s out of concern over something that would set off money laundering flags for IRS, FBI or Secret Service investigation.
Making periodic large checks out to “cash” is an obvious flag that something odd is going on. Giving someone a high-paying no-show job, or billing at extraordinarily inflated rates for goods or services, are other Made-For-TV level of classic way to launder kickback money.
$550/hour for one hour every week would seem like a very strange thing to an auditor. Why not give her a regular salaried position at $13.75/hour… Unless that would trigger/invite yet more scrutiny about W-2s, insurance, retirement benefits, etc. that she would then receive. Alternatively it would smell like a dodge to give her a regular supply of cash that is “off the books”. Either of which an honest accountant should be uncomfortable about signing off on.
If this wasn’t a business related expense - if he just gave her that amount out of his own personal checking account every week - I wouldn’t see what the problem is. It’s when he is including it as an under-radar and nebulous business expense related to his company that things get dodgy.
Filing. Paper work. Hanging out. I guess she feels some sense of obligation to do something. The hour she spends there is on payday, so she is there picking up her check anyway.
My accountant called me today to thank me for the referral. She is extremely conservative, and turned down his business.
She told me her big concern with the situation (which she said is a pretty commonly done way of shifting money) is if the couple breaks up, the woman could collect unemployment. If he fights it, his argument is an admission of fraud. If he doesn’t fight it, it hurts him financially.
Leo Bloom, please refrain from unnecessary political commentary in General Questions. You’ve been here long enough that you should know better than this. No warning issued, but next time please refrain.
Well, I talked with a contracting officer at work today. His response was, “Let’s put it this way. At the federal level you do the people’s business as either a federal employee, or a federal contractor. There is no third option.”
This is pretty much what I thought. I also think the friend may have couched her concerns in terms of it costing him money, but may not want to be part of the fraud.
The reason a lot of people do this is that the higher earner pays more in taxes. By having some of the income go to her, they “save” on the taxes. I know a lot of small business owners who do this. My friend’s former boss had his wife on the payroll.
Is there a reason it’s recorded as hourly pay instead of by salary? $550 an hour is a lot of money, but nobody would blink at a p/t office assistant who made just under $30k.
Somebody upthread mentioned that she might be a contractor, but then she’d be on the hook for the employer’s share of payroll taxes as well. Unless she’s got a business that’s showing a steady loss (or an expensive hobby that can be made to look like a business), that seems like a money loser to me.
That was just how he described their situation when he asked if I had an accountant I could recommend. He told me she was receiving a paycheck, and coming in for an hour to justify it in her mind, I guess.
He’s just an acquaintance of mine. The one thing we have in common is being clueless about running a business, yet running one regardless.
I think so. Say you’re the CEO of a corporation that made $100k profit this year. You don’t want to pay corporate tax on it so you hire your sister as a high-paid consultant ($100k/wk) to come in the last week of the fiscal year and critique the carpets. You write off 100k as a business expense and now you have no profit to pay tax on. Of course, sis gives you the money back later because both of you knew it wasn’t really hers to keep.
Yeah, but you better hope Sis doesn’t get mad at you about anything! Or get an expensive habit (like gambling, or drugs, etc.)
I know of someone who hid his expensive boat from child support by putting it in the name of the teenage son of his new girlfriend. Then the son turned 18, sold the boat, and used the money to pay toward college.
Is he literally paying for 1 hour at $550 / hr and writing it up as such? I thought that if you called someone into work you had to pay them for at least 3 hours. That’s how it is in MA anyway. Not that that would necessarily stop anyone.
(My part time job has a bad track record of not even giving me the $5 / hr I’m due. I wish people knew how often labor laws get broken in restaurants.
/ end hijack )
