Paying children to reduce income tax bill

[Juddy]

Have business where wife and myself as sole employees. Can I pay my children from business as a way of reducing overall PAYE bill?

 

[niceoneted]

Will they be employed in the business and are they of legal working age?

 

[Juddy]

Not at the moment working in the business but I could get them to do some hours during the week and put them on the payroll. Ages range from 10 to 18.

 

[Paddy199]

Once they have defined roles and you pay them a reasonable rate of pay, you should be fine. Also, all those employment laws re: hours of work etc do not apply to your own children. However, it has to be sensible i.e. saturday and a few hours a week in the evenings max. Remember they are meant to be studing and this is only pocket money for some help.

An example - The tax advice to farmers is to pay your children a wage to cover school expenses, etc. As such, the farmer is bringing such costs in as an allowable expense i.e. wage. There was an article in the Farmers Journal on just this topic about 2 weeks ago.

rob1, I am aware of s.811 and I am sure this doesn't qualify as agressive tax planning. You might clarify what piece of anti avoidance tax legislation you might be referring to which allows Revenue to disregard the payment of wages to minors as I am not aware of any.

 

[MidlandsBase]

Out of interest what is the youngest age you can employ your son/daughter? or does it vary between businesses. I have a software development company. My 11 year old has been developing his own software for the past year and I can see some advantage is having him write smaller components for some of my applications or web site developments.

 

[T McGibney]

An example - The tax advice to farmers is to pay your children a wage to cover school expenses, etc. As such, the farmer is bringing such costs in as an allowable expense i.e. wage. There was an article in the Farmers Journal on just this topic about 2 weeks ago.

This is a bit simplistic. Any farmer or other sole trader who pays artificial levels of 'wages' in respect of school-going children will face an increased risk of Revenue Audit.

If the audit Inspector queries the 'wages' they don't necessarily have to cite anti-avoidance legislation to have the claim disallowed.

All they have to do is invite the taxpayer to 'consider' whether they should submit an amended Case 1 and Income Tax computation, this time excluding the 'wages' claim. In most cases, the taxpayer will take the hint and cough up the tax, interest and penalties.

 

[Paddy199]

T McGibney,

Yes it is fine to pay your children a wage. Obviously it has to be realistic and you have to have defined roles, an hourly rate, keep record of hours etc. Revenue can of course question it but there is nothing in legislation that disallows it.

Employment legislation does not apply to your own children. For school going children, I would suggest a min age of 14 though.

 

[simplyjoe]

Most farmers children do work on the family farm in the evenings and on saturdays, sundays and holidays. Its crazy that they would not be registered, proper log of work kept and hours worked and payments made thru the PAYE system. No difference in these and other employees. It makes me mad to see kids working on parents farms and the the parents giving their kids money on a Monday when they are going to school and college and not having the two actions related. Just do it right. Problem is people are too lazy to keep proper records.

 

[Brendan Burgess]

I spoke to a farmer recently who is paying his son, who does absolutely no work on the farm, €20,000 a year.

The son is in his 20s, single, and in a salaried job elsewhere, where I assume he is already paying 40% tax, 5% USC and 4% PRSI.

I can't see the sense in this at all.

The farmer is paying €110.75 so he saves the tax and PRSI on €110.75 - say 55% - so his net cost is : €49.83

The son receives €100 and pays tax, USC and PRSI of say 49% (if his total income is less than €70,000) , so he gets €51.

There is a real risk that a Revenue Audit would ask to see records for the work done and I suppose he could say that he was a consultant to his father.

But where is the saving to justify the administration and risk involved?

I suggested just gifting the son €3,000 a year to avoid CAT.

Brendan

 

[T McGibney]

I spoke to a farmer recently who is paying his son, who does absolutely no work on the farm, €20,000 a year.

The son is in his 20s, single, and in a salaried job elsewhere, where I assume he is already paying 40% tax, 5% USC and 4% PRSI.

I can't see the sense in this at all.

Nor can I, to the point that I suspect he was pulling your leg Brendan. For a start 10.75% PRSI is not applicable in such situations as it's clearly not an insurable employment. Secondly, the unless he has somehow insulated himself from the farm incomes crisis of recent years, he won't have €20k to spare. And he probably won't be paying high rate tax either so the tax savings on his son's "salary" would be negative.

 

[Brendan Burgess]

Thanks Tommy


If he doesn't have to pay the Employers PRSI, then there would be some justification for it.

If he is paying the higher rate of income tax and his son is paying the lower rate, then surely there is a 20% tax saving?

I did wonder about a farmer declaring income over €100,000

But it just has to be €70k to work, doesn't it?

But even in the most favourable conditions it is just not worth it. Whatever about paying a son who has no other income because he is a student, it makes no sense to pay someone who has a reasonably well-paid job.

Brendan

 

[T McGibney]

If he doesn't have to pay the Employers PRSI, then there would be some justification for it.

No it's the other way round. For a family employment there has to be a compelling justification for it to be considered insurable under PRSI.

If he is paying the higher rate of income tax and his son is paying the lower rate, then surely there is a 20% tax saving?

Unless his job is paying him way under the minimum wage, the son will be well within the high rate tax bracket once he gets his €20k on top of it.

I did wonder about a farmer declaring income over €100,000

Unless he's laundering money, or he's Larry Goodman, he won't have earned anything near €100k in recent years from farming. The farm prices crisis has hit the biggest farmers worst of all.

 

[Brendan Burgess]

If he doesn't have to pay the Employers PRSI, then there would be some justification for it.

No it's the other way round. For a family employment there has to be a compelling justification for it to be considered insurable under PRSI.

I wonder if we are at cross purposes here?

I thought he had to pay Employers PRSI which makes this less attractive, because he has to pay out €10.75 for which his son gets no benefit.

However, if he does not have to pay Employers PRSI, then the scheme is more financially attractive.

Can the employment be bona fide and still not insurable? Does that mean the the father does not have to pay Employers PRSI and the son does not have to pay employees PRSI?

Edit: I see the answers here

http://www.welfare.ie/en/Pages/Family-Employments-_-PRSI---SW-102.aspx

The following categories of 'Family Employment' are the exceptions that are not covered by the Social Insurance system:

• If you are employed as an employee by your spouse.
• If you are employed as an employee by a 'prescribed relative' and the family employment relates to a private dwelling house or a farm in or on which both you and the employer reside.
• If you are not a spouse or civil partner and you assist or participate in the running of the family business but not as an employee (such as, a son/daughter who is attending full-time education and who participates in the business for example, helps out on a farm after school hours but is not an employee).

Brendan

 

[Brendan Burgess]

The farmer is paying €110.75 so he saves the tax and PRSI on €110.75 - say 55% - so his net cost is : €49.83

The son receives €100 and pays tax, USC and PRSI of say 49% (if his total income is less than €70,000) , so he gets €51.

So this should be revised to

The farmer is paying €100 so he saves the tax and PRSI on €100 - say 55% - so his net cost is : €45.00

The son receives €100 and pays tax and USC of say 45% (if his total income is less than €70,000) , so he gets €55

If the son is paying 20% tax rate, he pays a total of 25%, so he gets €75 which costs his father €45.

Of course, if the father is paying 20% tax and the son is paying 40% tax, this scheme is costing them money. This is not such an unlikely scenario.

Brendan

 

[T McGibney]

Of course, if the father is paying 20% tax and the son is paying 40% tax, this scheme is costing them money. This is not such an unlikely scenario.

If the farmer is in any way as affluent as he claims, and is compos mentis, I would consider it a highly unlikely scenario. Wealthy farmers as a class tend to be conservative types and rarely fall for such obviously harebrained tax saving wheezes.

 

[gnf_ireland]

The only reasons I can think of the farmer doing something like this is not for tax planning, but maybe to avail of more 'partnership' type grants for development of the farm. Some of these grants are very complex, and 'partnerships' between an older farmer and younger farmer can be beneficial. I don't know the details, but I have been advised this is the case.

Depending on the age of the farmer, and the son, and whether he has a green cert or not, it may make a difference for availing of CAT liability on agricultural land. I do believe there is now an "active farmer" test, and getting income from farming may support this theory..

But who knows - I am sure there is some method in the madness

 

[Purple]

Could it be a way of showing the son is an active farmer and so avoid inheritance tax when the father pops his clogs?

 

[jjm]

Could it be a way of showing the son is an active farmer and so avoid inheritance tax when the father pops his clogs?

now you are thinking like a farmer no point in working all of your life so the bearded brethren can squander it all and dance on your grave,