Five Things to Know When Hiring Your Child to Work for You



By John D. Faucher, Esq.
Introduction by Gary Wartik
April 1, 2015

Vision Economics works with John Faucher, Esq., an attorney in Westlake Village, CA who specializes in bankruptcy and tax law issues.  Mr. Faucher has an active website on which he regularly posts articles of interest.  This month we are happy to publish an article about a common practice about parents hiring their children to work in the family business.  As Mr. Faurcher points out, there is a legal way to employ family members, and then there is the other way.  Do beware, for the IRS may be watching.

The story

I love having my 18-year-old daughter work in my law firm.  She’s smart and motivated.  She gets to see law in action.  She’s done wonders for my website, and she gets the mail out.

She keeps a timesheet.  I pay her through a payroll company, which withholds funds for income and social security taxes, among other deductions.

Not every employer is as honest and real-world as I am about the employment relation with a child.  Hiring your child is perfectly legal, in fact, I encourage it, but it must be done carefully and transparently.  Some parents mistakenly believe that if they take some of their income and pay a child, they may take a deduction on the payment to the child and the child will pay tax at a lower marginal rate than the parent: a seeming win-win. Not so.

The IRS frowns on these schemes. The latest person to fall foul of the rules is a Ms. Patricia Diane Ross, who took her case to the Tax Court and lost: T.C. Summary Opinion 2014-68.

Ms. Ross owned a Schedule C business, Ross Professional Services, LLC, that helped government agencies staff their operations.  She had three children, ages 8 through 15.  The children, according to Ms. Ross, shredded paper, stuffed envelopes, copied, sorted checks, filed documents, put out the trash, carried equipment, and helped her shop for supplies. For these tasks, she paid the children.  But she made some mistakes that came back to haunt her:

1. She paid the children in pizza.  Rather than give the children a paycheck, she claimed she kept a ledger of how much they had earned and deducted the cost of their restaurant meals and a tutoring/play activity service from that ledger.  These expenses sounded to the IRS and the Tax Court judge more like the regular kind of support that a parent is expected to give to her children.

When I represented the Commissioner of Internal Revenue, I came across a family that paid their minor children a very regular wage: $5,000 twice a year, two days before the children’s private tuition bill was due.  The tuition bill got paid out of the children’s accounts.

Lesson one: if you employ your children, pay them in money rather than support.

2. She did not pay a regular hourly wage.  Dividing “wages” paid by the hours Ms. Ross reported for each kid resulted in an hourly wage varying from $4 to $30 with little correlation between the child’s age, skill, or task, and the wage paid.

Lesson two: if you hire your child, keep good time sheets and pay a regular wage.

3. She did not withhold Federal income tax or other deductions, saying that the children did not need to file tax returns.  But anyone who makes more than the standard deduction ($6,200) plus the exemption amount must file a tax return.  When the child is being claimed as a deduction on Mom’s tax return, the exemption amount is zero.

Lesson three: treat your employed child as a real employee subject to withholding.

4. The children got paid for chores: “the activities performed by petitioner’s children seem analogous to . . . washing windows, cleaning screens; shoveling snow; moving grass; tending shrubs, trees, and underbrush; assembling papers; picking up mail.”  The Court found these activities sounded more like parental training and discipline, not services performed by an employee for an employer.

Lesson four: pay your children only for tasks that advance the business, not for tasks that advance the household.

5. She did not give the children their own bank accounts.  Well, the children actually had bank accounts about 200 miles away (where their father lives?), but Ms. Ross said she was too busy to open local accounts for them.  Thus, she said, it was “more convenient” to pay for things as the children directed her to, matching spending against their “earnings.”  It does not appear that the judge found this explanation convincing.

Lesson five: give your employed children real accounts in a real bank.

I am pleased to say that, if the IRS were to audit my law firm, it would find that my daughter’s earnings are real earnings and a real deduction from the income I collect.

Mr. Faucher may be reached by writing him at jdf@johndfaucher.com, or by calling 818-889-8080.

Baby Boomers Looking at Retirement – Business Succession Plans Crucial



By Cristian R. Arrieta, Esq.
Edited by Gary Wartik
January 15, 2015

Our monthly newsletter continues to offer articles of interest provided by professional colleagues that offer sound advice to our clients and associates. This month we are offered some timely and compelling direction by Cristian Arrieta of the Lawthorp, Richards law firm in Oxnard, CA, a firm that offers a substantial business law practice. He specializes in trusts and estates planning.

As Mr. Arrieta notes, it has been commented that working for oneself is great because you get to work half-days. You even get to choose which half – the first 12 hours or the second. Funny as that may seem, Baby Boomer generation business owners smile knowingly, and the thought of retirement is alluring. Logistically, however, said Boomers might find themselves in a pickle when it comes to business succession, unless they focus now on some forward-thinking.

Born between 1946 and 1964, the US Boomer generation of small business owners has been, and continues to be, a major driver of our economy (by some estimates 66 percent of all businesses with employees are Boomer owned). Sometimes referred to as the “Me Generation,” Boomers sunk their teeth deep in the American Dream, and they have become the wealthiest generation on the planet. They are also the most numerous – approximating 80 million, and they are currently celebrating their 65th birthday at the rate of about 10,000 a day!

On the heels of the Boomer generation is Generation X, numbering about 50 million, currently aged forty-something, by and large, and entering their professional peek years. Proportionately, there’s about half as many Gen Xers as there are Boomers with any comparable business acumen. With that in mind, if every Boomer-aged business owner today sought to hand the torch off to a Gen Xer, there would be a major demographic bottleneck.

As a trusts and estates attorney, without betraying any confidences, I can disclose that very few of my small business-owning clients have devoted much thought to their business succession plan prior meeting with me (only about 30% of people have done any estate planning at all). Business succession needs to be carefully crafted, preferably at least five years in advance of retirement, and there are a number of moving parts. Moreover, considering the demographics, it should be clear that failing to plan now will likely dampen future opportunity (and therefore value) translating to a less-than-optimal crossroads for retirement age business owners: sell my business for a song or continue to work 12 hours a day.

Take, for example, the business owner who has built a firm over thirty-five years of dedicated, hard work. Now that the business is profitable and rewarding for the owner, he finds that he or she wants to live a little. So he hires a young go-getter who is aggressive and ambitious, with good people skills, and a knack for generating new accounts. In time, the owner is able to play some golf and travel with their spouse, while the identified key employee is content managing the firm.

With retirement in sight, the owner crafts a business succession plan. He provides bonuses for key employees, say 10 shares of common stock, keeping 90 shares for himself. In conjunction with this, he offers his key employee the opportunity to buy his shares at the rate of 10 shares each year. In the fifth year, the owner will take a secured promissory note for the balance of the purchase, payable to him over five years and bearing an annual interest rate of 10%.

Such an arrangement would nicely supplement the owner’s income in retirement and defer income taxes. A structured buy-out will tend to maximize the long term value of the firm, which could otherwise dissipate in the absence of a plan. However, it will work only if it is implemented from a position of strength, early on, instead of waiting until the options become few.

Building a successful business takes guts and years of hard work. Business succession requires careful planning and foresight as well. Boomer generation business owners ought to consider the demographic challenges ahead, and implement a plan now, so they can secure their accustomed standard of living in retirement.

Vision Economics continues to work with small and medium-sized businesses that have need for outside professional services, including those dealing with succession planning issues. Mr. Arrieta is available to provide legal advice and appropriate legal documentation of succession plans as needed. Mr. Arrieta may be contacted through Vision Economics at 805-987-7322, or by calling him directly at 805-981-8555.

The Economy is Looking Better as State Jobless Rate Continues Decline



By Gary Wartik
December 31, 2014

Economists have differing interpretations about changes in the economy. Some paint an optimistic picture of the post-recession economy and what to anticipate in 2015. Others are more pessimistic about the figures related to GDP/GNP, unemployment figures, the retail economy and housing starts. The economy likely is somewhere in-between the two schools of thought.

Looking at the economy from an optimistic point of view, we close out 2014 with a recovering economy. The stock market has hit new highs based upon, in part upon improved corporate sales and earnings. Employment levels have continued to increase. Employment remains a key economic indicator. As the 2008 recession gained a head of steam, unemployment rates at the state and national levels increased by more than 50 percent. During the last three years we have witnessed a significant recovery in the job market as employers enjoyed increased sales and recognized the need to fill open positions and create new ones. The California unemployment level in June 2008 stood at 7 percent and grew to 12.4 percent by February 2010, one of the highest in the nation at the time.

Data from the California EDD reflects that the state added 90,100 jobs during November 2014, accounting for 28.1 percent of all jobs added nationally. Over a year’s time, California payrolls have increased by 2.2 percent, comparing favorably with the U.S. rate at 2.0 percent. With continued net increases in employment, California’s jobless rate has decreased to 7.2 percent.

Leaders in California’s November employment figures included the hospitality and leisure sectors which led job increases with some 15,600 new positions. Retailers added 14,500 new jobs. Construction also added a healthy 12,900 jobs during the period. Unfortunately, during the same period, manufacturing actually shed 10,500 jobs, and the movie and sound recording studios lost 3,000 jobs despite a newly enhanced state tax credit program designed to keeping movie and TV production from leaving California to film elsewhere.

The challenge in reading unemployment figures is that it does not reflect the pay level of new jobs, nor does it measure the level of under-employment. Many of the new jobs cited are in food service, hospitality and retail, reflecting improvement in those industries, but most are offered in the range of $10.00-12.00 hourly. These jobs are important to the economy, but pay poverty wages for anyone who is the source of their own financial support. “Under-Employment,” those who are not working a full forty-hour work week, and at a pay level well under their previous employment, also reflects another gap in employment data. These two caveats are not reflected in local or national government employment data.

On the bright side of employment equation, there are tens of thousands of jobs in California and around the nation that are available at any given time. Many pay reasonable salaries and above. A visit to the growing number of on-line job sites such as Job2Careers, Career Source Network, JobQuicken,com, JobGrabber.com, CareerBuilder.com and others makes it obvious there is employment for those with applicable work experience and for those holding at least a bachelor’s degree. The listings reflect that education and experience still count.

Next month we will examine the entire employment landscape from the position of looking back at the year of 2014. Then, looking ahead at 2015 we will offer a few thoughts about the economy that continues to recover, and why.

For further thoughts on business and the economy, please contact us at Vision Economics at 805-987-7322 or by email at gw@visioneconomics.net.

Good News for the Economy



Good News for the Economy

Written by Gary Wartik

Notwithstanding the current action, or inaction of the US House of Representatives with respect to funding the federal government, there is continuing good news in the American economy on another front.  Time will take care of the budget issues, perhaps with a bit of political blood on the floor before it is all over, but hopefully without substantial delay.

So, what is the good news?  It is no secret that America is becoming energy sufficient.  While a large part of the world’s oil and gas reserves are in “bad neighborhoods,” such as Iran and Venezuela, and in the unstable Middle East, the value and volume of recoverable oil and natural gas continues to grow in the United States as well as in Australia, Brazil, Canada and Mexico.

Shale gas in particular has made headlines as new gas fields have opened up in Arkansas, California, Louisiana, North Dakota, Oklahoma, Pennsylvania and Texas.  These fields have contributed to nearly a 90 percent decrease in the wholesale cost of natural gas as gas production has increased 20 percent during the last four years.  Annual production increases of 5.3 percent are projected by the industry through the year 2030.  As a result, heating homes and industry, and generating electricity will continue to cost less, saving Americans billions of dollars in annual energy costs.

Hunting for oil is known to be very costly, and often consumes huge volumes of energy.  While conventional oil extraction continues in coastal waters off the United States, Norway, Great Britain, Vietnam and Brazil in particular, it is oil extracted from shale rock, employing new technology that is allowing for extraction of oil thought unrecoverable less than ten years ago. With world oil selling for around $103 per barrel on October 1, extracting new oil with new technologies has become cost effective.

The oil boom in the seven states mentioned has contributed to a notable decrease in the amount of oil imported by the US. According to The Economist, new recovery methods have accounted for $238 billion in economic activity since 2009, with 1.7 million new jobs created and $62 billion in new taxes generated by state and local governments.  The benefits of cheaper natural gas and oil are noteworthy, with one estimate cited by The Economist as valued at $342 billion in projected new economic activity in the period 2015-2020 that will include generation of another 1.2 million new jobs.

One of benefits of this change in America’s expanded “Oil Patch” is that new oil should contribute to stabilizing domestic and foreign oil markets, keeping the cost of energy in check.  That scenario should contribute to lower costs to do business in the US, particularly in the manufacturing sector that hopefully will contribute to retaining and also growing the US manufacturing sector.  Absent this change, more factories would likely close with jobs exported abroad.

The second benefit is political.  America will be less vulnerable to political pressure by those who would employ tactics similar to OPEC’s 1973 and 1979 oil embargoes.  The country will also be much less impacted by prospective disruptions in the flow of oil from the Middle East during whatever crisis may be around the corner.

The current financial crisis manufactured in Congress related to funding the government will eventually be resolved.  The future of oil and gas exploration in the US is long-term, and will literally brighten America’s economic and political future.  Something to celebrate for sure.