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What’s a reasonable salary for a six-year-old’s part-time work?


Peter Gulia

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Many small-business 401(k) plans allow an owner’s young children as participants.

To support contributions, the child must be capable of, and actually perform, real work that is useful to the business.  Likewise, the business must pay no more than reasonable compensation for that work.

Sometimes, the facts call into question how real the child’s job or pay is.  For example, some might wonder whether a six-year-old (who presumably attends school during about 80% of a year) does enough work to earn $24,000, or even $20,000, in a year’s wages.

Which facts are bad enough that you would suggest a client needs advice about whether the IRS would see the child’s wages as a sham?

If the business does no advertising (or uses none in which a model’s image would appear), is there an age that is too young for an owner’s child to be a worker?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Well, as a TPA it's not my place, but whenever we are discussing wages to family members I tell them the pay has to be reasonable for the services rendered.  

Now, as an employer who did this myself with 4 kids, one year I actually got a letter from the SSA questioning the wages to my youngest daughter based on her age.  The kids did come into the office at least a couple of times a month to fold, stuff and mail billing statements and the occasional mass mailing (I'm old - snailmail BITD).  I was paying them more than minimum wage, but not excessively so, at least not IMO.  IIRC I kept them under the 1040 filing threshold.  

Absent use of likeness, I'd not be comfortable with $24K for a 6 year old, that's for sure.   I generally discourage letting really young kids into the plan, even if there are no NHCEs.  One reason is the reasonableness issue, the other is I'm a big fan of having the parents gift the kids enough money every year for a Roth IRA contribution assuming the kids have earned income.  

I carry stuff uphill for others who get all the glory.

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shERPA, thank you for your helpful observations.

BenefitsLink mavens, I imagine many TPAs think "it's not my place"; but does this issue ever get to "if you see something, say something"?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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If I mention it, the question back is typically "how much do I pay them?"   I explain that I can tell them the impact on plan contributions for various levels of pay but I recommend they consult with their CPA regarding the "reasonableness" of compensation, since they want to deduct it on the business return.   I also tell them if the IRS disallows the deduction for the kids' wages it will then disallow their related plan contributions as well, and this can lead to all sorts of unpleasantness.  I will usually end this part of the discussion pointing out the 15.3% payroll tax they incur and remind them that "pigs get fat, hogs get slaughtered.  Don't be a hog."

I carry stuff uphill for others who get all the glory.

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My position is that we inform the client (on the record for CYA purposes) of the reasonable compensation requirement and that it is up to the client, hopefully with formal input from their accountant and/or legal counsel, to determine reasonableness. If it flies (with or without subsequent scrutiny) then great, and if it doesn't you have the "I warned you/I told you so" in your defense - not that a legal defense is needed.

26 minutes ago, shERPA said:

remind them that "pigs get fat, hogs get slaughtered

And YES - that is always sound advice!

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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45 minutes ago, shERPA said:

... and remind them that "pigs get fat, hogs get slaughtered.  Don't be a hog."

There's an extension to that I've used in dealing with clients:  "Pigs get fat, hogs get slaughtered, and attorney's eat bacon."

Translation:  If you want to do something, pay me now (to fully vet the proposal), or pay me much, much more later (when it blows up).

 

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Think I mentioned it before but I have a client who has his wife and 2 daughters on the payroll and they don't show up ever!  The daughters have high paying jobs elsewhere and the wife doesn't work at all.  But each year they all get a W2, their 401ks maxed out out of 1 paycheck, profit sharing and SH match.  Nice deal if you can get it.  Client's CPA is a friend of mine so it's absolutely true. 

4 out of 3 people struggle with math

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In the case of models and such, doesn't the company usually pay the modelling agency or the company making the commercial/ad instead of compensating the model directly?

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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Five years old is when I began support work in my father’s accounting practice.

He taught me numbers, from 000001 to 999999, before the elementary school taught me any.

Alas, neither 401(k) nor any IRA then existed; and my wages was $0.00.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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10 minutes ago, Peter Gulia said:

Alas, neither 401(k) nor any IRA then existed; and my wages was $0.00.

Au contraire...  You were fed, housed, schooled, and learned valuable life lessons - including analysis and a work ethic -of which all of us here on Benefitslink benefit from your presence daily!

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MoJo, thank you for your kind words.  And yes, while he did no tax dodge, the compensations were worlds better than money.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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On 7/30/2021 at 4:40 PM, Bill Presson said:

It would likely be more accurate than some data we get from employers.

It just makes you shake your head sometimes...I don't know how many times I've wondered how these people get out of their driveway without hitting their own mailbox.

Ed Snyder

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