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.

Searching for Weakness



By Mark Schniepp
April 15, 2015

Peak of the Cycle?                                    

We are at or near the peak of the economic cycle. That’s my opinion.  We could also be in for a longer period of expansion than normal, because the sluggish period of recovery during this economic cycle was much longer than expected.  If so, then my thoughts about the peak could either be premature or the peak could evolve into a longer running plateau of economic growth.

Expansions generally end when the economy overheats, occurring when the labor market is at full employment and businesses are operating beyond their capacity. Inflation begins to rise along with interest rates, and consumers tend to overspend and become debt laden.

inflation

We are not there yet.  The labor markets are not yet at full employment, though that condition is rapidly approaching.  For anyone over 25 years old, the unemployment rate is effectively “full.”  And this will translate into rising wages and salaries this year and a higher rate of inflation in 2016.

unemployment

We are expecting the Federal Reserve to begin raising the federal funds rate this summer, as early as June.  Treasury rates are expected to move higher along with mortgage rates by the fourth quarter. The 30 year conventional mortgage yield is forecast to push past 5 percent next year.

Looking for Weakness                                        

The economy is now in its best condition since the end of the Great Recession. Consequently, we are gradually turning our attention from how strong the current economic expansion will be to a search for any weaknesses, i.e., potential excesses in household spending and debt, financial lending practices, or over extended asset prices.

Household debt is currently at the lowest level since reliable records have been kept. The amount of credit card debt fell to the lowest level since 2002. This is one of the key reasons that the U.S. economy is outperforming much of Europe and Japan.  Corporate debt as a percentage of total corporate equity is also at a 12 year low.

household debt

Household debt is the sum of mortgage debt plus consumer debt including credit card, auto, and student loan payments. Currently, household debt as a percent of disposable income is at its lowest level in more than 35 years

In general, households and businesses are in better financial shape to spend this year and next.  Banks are in a better position to lend.  These conditions in concert, along with likely increases in wages and salaries, point to a predicted 3 percent increase in total spending this year, a meaningful improvement over 2013 and 2014.

Asset Prices: The Stock Market 

Another bubble Building?                                              

The stock market run has been fairly sharp since the beginning of 2013. And to date in 2015, the financial markets continue to move higher. Adjusted for inflation, the S&P 500 is currently at its highest level ever. The Nasdaq reached a near all time record close on March 20, and the Dow Jones Industrial Average is just 300 points from it’s all time record high set on March 2, 2015.

As of April 7, the S&P 500 P/E ratio stood at 20.29.  This is the twelve month trailing price to earnings version of the ratio. The average P/E ratio for companies comprising the index since 1979 is 20.6. The Dow Industrial Average P/E ratio is 16.33, just slightly above the year-ago level. The obvious question is whether current P/E ratios are worrisome, indicative of another bubble?  There is no shortage of current online debate on this subject, which can get quite complex.

price to earnings

The stock market numbers are worth following closely to ascertain the degree of speculative behavior that might be infiltrating current values.  But it’s not an immediate concern because expected earnings reports for the first quarter of 2015 appear to be strong.

No Leaks in the Dike                                

Interest rates remain low, gasoline prices are falling again, and the dollar continues to strengthen.  The economy is stable and growth rates for most of the important indicators may reach their best levels this year.  We’re looking for initial problems, but we don’t see many at this time.  So enjoy the spring.

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.

For California Business, Out with the Old, and in With the New; Real Help to Create New Jobs



By Gary Wartik
April 1, 2014

Really, the legislature and governor actually came up with what promises to be an effective tax credit program designed to encourage out-of-state companies to relocate to California, to assist new companies to open here and existing California companies to expand in the Golden State.

The new California Competes Tax Credit program replaces the more controversial and challenging California Enterprise Zones program.  The Zones were designated geographic areas with lower wages and higher poverty in which local businesses purportedly could obtain tax credits for adding to their job base by adding local residents to their payrolls.  Perhaps good in concept, the program was generally viewed as a failure in many areas, in part due to eligibility issues for many jurisdictions to qualify for Enterprise Zone designation, and an inability to confirm that tax credits actually contributed to hiring more workers where the Zones were created.

During the 2013 legislative session, the Governor’s Office of Business and Economic Development (GoBiz) obtained legislative support to replace Enterprise Zones with the new California Competes tax credit program.  During the current fiscal year, $30 million in credits will be available, and during its second year of operation, the program will make available $150 million.  In the years 2015, 2015 and 2017, $200 million will be available annually, so this is a rather robust program.

While space in this article does not lend itself to a full report, here are the three key components of the new law:

California Sales Tax Exemption – businesses that purchase equipment and equipment parts in California for manufacturing, and as part of research and development in biotechnology, engineering and the sciences, will be eligible to apply for a waiver of the state portion of the sales tax on the new equipment.  On a $100,000 purchase, this could mean a tax savings of more than $4,500.  Up to $200 million in purchases by a company may be credited in one year, saving the company, at the maximum level; more than $100,000 in sales taxes.  Some manufacturing real estate transactions are also eligible for tax credits.

California Income Tax Credits – will be available based upon the number of full-time jobs a company creates, the compensation and benefits paid to those employees, the amount of investment the new and/or expanding business invests here, the overall impact of the business to the state, region or other local jurisdiction, and the opportunity that the company has for future growth and expansion in a given jurisdiction.  The poverty and local unemployment levels will also be factors in determining eligibility.  While the goal is to help grow California business, it is really about putting people back to work by creating new jobs, especially in areas hardest hit by the effects of the Great Recession.

Business Plan – applicants will need a business plan that reflects on how the tax credit funds will be applied, and how the company otherwise plans to grow within California.  This is key to helping determine whether an applicant has planned well to develop and grow its business.  Of course, whether a company is applying for a tax credit or not, having a solid business plan is always a good business practice.

The California Competes program will have what amounts to quarterly open application periods.  The first one ends in mid-April for the application approval by July 1, 2014. Then, in July the second round of applications will be eligible for review by GoBiz, for funding approval in September.

All applications for tax credits are subject to negotiation between the applicant company and a GoBiz approval committee.  Thirty-five percent of the funds will be available for small business, those with less than $2 million in annual gross sales, with the balance of the funds available for medium to larger companies.  The application process is somewhat involved, but may be done on line, and help is available through GoBiz (visit www.business.ca.gov).  Help is also available through most local economic development collaborative offices, local Small Business Development Centers, as well as through various consultants, including Vision Economics.

For more information, contact Vision Economics

 

Minimum Wage Requirements Remain Controversial, but Are Here to Stay



Minimum Wage Requirements Remain Controversial, but Are Here to Stay

By Gary Wartik, December 9, 2013

The very subject of state and federal minimum wage laws generate a visceral reaction with many involved in small business and with some economists.  Raising the minimum wage rate generates an equal amount of heat among its other detractors.

The state minimum wage will rise to $9.00 per hour on July 1, 2014, and move to $10.00 on January 1, 2016, up from the $8.00 rate California has had in place since January 1, 2008.  During the last thirty years, California’s minimum wage has increased from $3.35 (1981-1988) to the levels now signed into law.  Overall, the increases have just about kept pace with the state’s inflation rate.  However, the pace of the increases has been somewhat uneven, as in the case of the current changes.  The federal minimum wage remains at $7.25 per hour, but legislation is pending to raise that figure to $9.80 starting in 2014.  One may assume, however that with the present gridlock in Congress, the changes will not be adopted until at least the next Congress convenes in 2015.

The vast majority of those affected by the minimum wage are young people and those who may be older, but under-educated and with limited working skills.  Proponents of raising the minimum wage contend that increasing the minimum wage acts as an economic stimulus. When low-income households earn more money, they almost assuredly will spend all of it, injecting more dollars into the economy.  In fact, a recent study by the Federal Reserve Bank of Chicago concluded that following the last increase in the federal minimum wage in 2009, spending by households with at least one minimum-wage worker increased by $700 per quarter.  A policy paper from a 2012 report by the Economic Policy Institute in Washington, D.C. noted that “By increasing workers’ take-home pay, families gain both financial security and an increased ability to purchase goods and services, thus creating jobs for other Americans.”

During periods of ongoing economic growth, the issue of raising the minimum wage generates less heat than when the change occurs during times of a weak or slow-growth economy.  While the great recession of 2008-2011 is technically over, many consider the economy as fragile, and thus this is not the time to be increase the minimum wage until the economy truly turns around.

Opponents of the minimum wage believe that an increase in the minimum wage is likely to be met by reduced hours or an increase in the workload, especially in the current economy.  Others complain that “artificially” increasing the minimum wage puts inflationary pressure on the economy since increased wages need to be paid for, either by squeezed profits or an increase in prices, or a combination of both.

This may be particularly true within certain industries such as agriculture, retail, food service and hospitality where the minimum wage is most crucial, and further it may be true when the increase is as large as the current 20 percent increase.

Lastly, there are those who believe that available data does not support the thesis that a minimum wage in fact reduces poverty, but in reality just raises the cost of doing business which, in turn is ultimately passed along to the consumer.  Recent history is replete with companies, such as within the fast food industry threatening to reduce the number of jobs they offer, or reduce the number of hours that hourly employees actually work if the minimum wage is increased.  While the threats have been many, in actuality there is little evidence that the workforce is reduced, or their hours reduced for any lengthy period following the adjustment in the state’s minimum wage.  After all, the work still needs to get done and that requires workers showing up to fill the need.  In reality, it has been the higher wage American manufacturing jobs, 20 percent of which were eliminated between 1987 and 2007 (1), and another 1.8 million jobs lost, on a net basis from 2007 forward (1), that offers an irony that should not be lost on us all, and about which we should be more concerned.

If one concludes that the minimum wage is here to stay, then one may also conclude that minimum wage increases have become another variable in the cost of doing business.  Where that view comes under some challenge, however is when the minimum wage level is left in place too long and then the legislature, or Congress move to close the gap with a single large increase over a short period of time. That is what has just occurred in California, and what is also proposed for Congressional action.  It would be more prudent, and thus less disruptive to the economy to have annual increases in the minimum wage tied to the rate of inflation.  This approach would offer more balance in the economy since the changes would be absorbed more slowing by the business community.

There is one other thing to ponder.  If there was no minimum wage, what would someone who earned $3.35 hourly 30 years ago in California be earning today?  We don’t know for sure, but what we do know is that it likely would not be close to $9.00 per hour, and further, we know for sure that most of us would not want to try to live on whatever that figure might have been.

Vision Economics is available to work with small and medium-sized businesses in the effort to make their operations more efficient, and thus more profitable.  For a complimentary phone introduction, please call us 805-987-7322

 

(1)  US Bureau of Labor Statistics

Can Businesses, Especially Small Businesses Borrow Money Yet?



Today’s economy has shown signs of growth now for the last twelve months or so.  The stock market has grown nicely, in fact ahead of the economy, and housing starts are creeping up.   As well, other economic trends such as manufacturing are finally starting to trend upwards as well, especially in the bell-weather automotive industry.  These are all good signs. However, if you are a business owner, especially a small business owner and have tried to crack the wall of bank lending, you can still find areas in the economy that aren’t where you would like or need them to be.

Thanks to many factors, including billions of dollars in bad loans, banks and other lending institutions are still being tight with their funds. While not an impossible task, borrowing money today is still a tricky proposition.  All in all, with good credit and a solid proposal as reflected in a business plan, especially those backed with tangible assets such as real estate, money is actually available.  However, don’t expect the process to be simple or quick as lenders are paying much closer attention to the details of a loan application than ever before.   In short, banks are looking for credit-worthy borrowers that can demonstrate through their business plan that the new loan can be serviced and that the funds will yield new dividends for the borrower.

Business consultants such as those with Vision Economics, located in the Camarillo CA area can help you decide if, and when, you need to pursue a lending opportunity to take your business to the next level.  While today’s economy is slowly moving in the right direction, business consultants can help you make sure your business is ready to take that next step with a bank loan.  Give us a call and we will walk you through the process and connect with a banker who is interested in your business.