Is a "financial gift" in lieu of wages legal?

[ewmon]

A somewhat well-to-do, well-educated and supposedly very ethical person offered an unemployed friend of mine some work, but my friend receives unemployment benefits, so this person — without my friend saying he didn't want to lose his benefits — offered my friend "to arrange a financial gift" ($10K+) in lieu of wages, so he wouldn't need to report it (but, obviously, the personal/social/ethical obligation to do the work would still exist).

 

My friend didn't know if it was legal or not and felt unable to question this person about, so he asked me, but I don't know either. I thought the whole thing stank, especially the word "arrange". Any thoughts or facts?

[Phi for All]

(but, obviously, the personal/social/ethical obligation to do the work would still exist).

There's the rub. As long as the expectation exists that work will be performed and paid for by the gift of money, your friends are scamming unemployment AND the IRS.

 

Gifts up to US$13,000 (as of 2011) aren't taxed, but would be considered income if there is an exchange of work, and therefore subject to wage taxes. Similarly, if you're paid for any work you must claim it with unemployment so your rate can be adjusted.

 

If your friends could truly work it out where the money and the work were freely given without any expectations, they might be legally in the right. I still don't see how that would work around their personal morals, but some people are more comfortable with grey areas.

[swansont]

IMO unethical and possibly illegal — as any "under the table" arrangement would be, but OTOH it's completely understandable in this climate. $10k is probably chosen (in part) so as not to trigger the gift tax, and then you skirt all of the taxes on the money. One question I have is whether your benefits would reset the clock after a short stint of employment; I don't know if state benefits are limited by when you started collecting unemployment or if you are limited to some number of weeks in a time period (e.g. 26 weeks out of a year). I wonder if people turn down part-time or temporary work because of the specter of losing benefits.

[imatfaal]

Whilst not something I am an expert I would say that in the UK this would be treated as deliberate tax evasion - which would mean that tax would be due as would a fine. Ethically - it is clearly remuneration for work done and to evade tax on it should be treated in the same manner as being paid a portion of a salary under the table.

[Phi for All]

Whilst not something I am an expert I would say that in the UK this would be treated as deliberate tax evasion - which would mean that tax would be due as would a fine. Ethically - it is clearly remuneration for work done and to evade tax on it should be treated in the same manner as being paid a portion of a salary under the table.

It could only be called illegal if there is a direct line between the work and the compensation. A lot depends on the work done, of course. If the work is something that could be observed and documented, then the payment of the "gift" might alert the revenue service and they could argue a case.

 

I would imagine there are plenty of things I could do for an employer (such as writing proposals) that no one would ever know I had a hand in (assuming others could simply put their names to the work). Something like that wouldn't be necessarily prosecutable, but it would still be against my morals.

 

However, I might do this if the employer was also a very good friend. I think I could justify having one of my closest friends give me a gift of $10K, and me saying thanks by doing some pro bono work for him. As long as I knew there was no observable line between his gift and mine so there would be nothing to misconstrue as illegal, my friend would be safe. If I didn't know the employer very well, then it would very obviously be both illegal and immoral.

 

I thought the whole thing stank, especially the word "arrange".

Regardless of whether it's illegal or immoral or both (note the emphasis), the "arrangement" seems rather generous and selfless, actually. It doesn't really benefit your wealthy friend at all. He can't write off the payment if it's a gift, so he's losing a lot more taxwise than he would by paying the wage tax on $10k in compensation. Your unemployed friend is the double winner here.

 

So the word "arrange" seems like it's merely in terms of the paperwork involved.

[swansont]

Regardless of whether it's illegal or immoral or both (note the emphasis), the "arrangement" seems rather generous and selfless, actually. It doesn't really benefit your wealthy friend at all. He can't write off the payment if it's a gift, so he's losing a lot more taxwise than he would by paying the wage tax on $10k in compensation. Your unemployed friend is the double winner here.

 

So the word "arrange" seems like it's merely in terms of the paperwork involved.

I disagree. It may be that the work will not be done as efficiently as if you hired a professional, but it's still work done for some amount of money — the wealthy friend is getting something for the money s/he pays, assuming the work was going to be done regardless, so it depends on the details of the arrangement In fact, if less/no taxes are going to be paid (the buyer of a service doesn't pay a wage tax in the US, but I don't know about elsewhere), it's possible that more work could be arranged for the same cost, since this overhead has been eliminated. I don't see how this is particularly selfless on their part.

[tomgwyther]

Your friend could ask for the wages/gift to be paid, not in central bank issued currency but in gold.

6 ounces approx.

it's a far more stable and valuable currency than the USD, plus (in the UK at lest) there is no tax to be paid on it. The gold would also serve as an excellent start to a retirement fund/long term investment.

Silver would be another option as it's easier to work with small amounts

[Phi for All]

I disagree. It may be that the work will not be done as efficiently as if you hired a professional, but it's still work done for some amount of money — the wealthy friend is getting something for the money s/he pays, assuming the work was going to be done regardless, so it depends on the details of the arrangement In fact, if less/no taxes are going to be paid (the buyer of a service doesn't pay a wage tax in the US, but I don't know about elsewhere), it's possible that more work could be arranged for the same cost, since this overhead has been eliminated. I don't see how this is particularly selfless on their part.

I admit I am assuming the arrangement is satisfactory (other than legally or ethically) to both parties, and that the wealthy person isn't getting an unfair amount of work for his $10K, since this was not mentioned in the OP. If this is so, then the work gets done regardless. But the wealthy person pays more by getting the work done without the tax write-off and the unemployed friend gets more by being compensated while not losing his unemployment benefits. Perhaps "selfless" was inaccurate, but I was responding to the idea that "to 'arrange' a financial gift" made the deal "stink" in terms of taking advantage of the unemployed friend.

[swansont]

I admit I am assuming the arrangement is satisfactory (other than legally or ethically) to both parties, and that the wealthy person isn't getting an unfair amount of work for his $10K, since this was not mentioned in the OP. If this is so, then the work gets done regardless. But the wealthy person pays more by getting the work done without the tax write-off and the unemployed friend gets more by being compensated while not losing his unemployment benefits. Perhaps "selfless" was inaccurate, but I was responding to the idea that "to 'arrange' a financial gift" made the deal "stink" in terms of taking advantage of the unemployed friend.

 

Depends on how it happens. If it's a personal payment, there is no tax write-off. I don't know how a business would be able to give a cash gift to a person, so I was assuming it wasn't.

 

I didn't see this as taking advantage of the unemployed friend. I think it takes advantage of all taxpayers who don't cheat the system.

[imatfaal]

Your friend could ask for the wages/gift to be paid, not in central bank issued currency but in gold.

6 ounces approx.

it's a far more stable and valuable currency than the USD, plus (in the UK at lest) there is no tax to be paid on it. The gold would also serve as an excellent start to a retirement fund/long term investment.

Silver would be another option as it's easier to work with small amounts

 

Gold is anything but stable - it has gone up by 1.2% so far today - and has varied (in both directions) by over 4pct in a business day in the last few months. If it was in consideration for work done then tax would be payable. Also arranging physical delivery of gold entails quite high costs for small amounts.

 

It could only be called illegal if there is a direct line between the work and the compensation. A lot depends on the work done, of course. If the work is something that could be observed and documented, then the payment of the "gift" might alert the revenue service and they could argue a case.

 

I would imagine there are plenty of things I could do for an employer (such as writing proposals) that no one would ever know I had a hand in (assuming others could simply put their names to the work). Something like that wouldn't be necessarily prosecutable, but it would still be against my morals.

 

However, I might do this if the employer was also a very good friend. I think I could justify having one of my closest friends give me a gift of $10K, and me saying thanks by doing some pro bono work for him. As long as I knew there was no observable line between his gift and mine so there would be nothing to misconstrue as illegal, my friend would be safe. If I didn't know the employer very well, then it would very obviously be both illegal and immoral.

 

Regardless of whether it's illegal or immoral or both (note the emphasis), the "arrangement" seems rather generous and selfless, actually. It doesn't really benefit your wealthy friend at all. He can't write off the payment if it's a gift, so he's losing a lot more taxwise than he would by paying the wage tax on $10k in compensation. Your unemployed friend is the double winner here.

 

So the word "arrange" seems like it's merely in terms of the paperwork involved.

 

I am not a tax lawyer - but I wouldn't relish arguing your first point with either HMRC or IRS and claiming they needed to show a direct causal line. I reckon they would charge you tax at emergency levels and then ask you to prove that the money received had nothing to do with the work done. Revenue departments tend to have fairly draconian powers (that most of the time they eschew) - but in situations like this I think they might well be able and be willing to reverse the burden of proof.

 

The tax authorities being alerted to the fact is a much more difficult area - for a sum as small as 10k I cannot see how this would come to the revenue's attention without someone dropping them a hint; but many honest tax-payers do hate being cheated (and that is what is happening) and they might take advantage of the anonymous tip off lines that are available. I am pretty sure that any revenue service will disagree about there being little link between a gift and pro bono work - if the gifts are every year and the work is a one off (or vice versa) then it could make sense, but if both the gift and the work are unusual and contemporaneous they would try and charge you, no matter your protestations. I would be very surprised if there isn't precedent on this matter in both UK and USA - but my academic westlaw subscription has lapsed and I cannot afford a personal one.

 

Whilst it might not benefit the friend financially to pay above the board (ie won't be able to put it against income to lower profit and thus tax) it will definitely reduce the liabilities (employers contribution etc) and responsibilities that an employer has to an employee and to the government. It is, in the end, a nice cosy agreement between friends; but in the UK (and from what others have said) in the USA it would be evasion of tax and thus morally and legally suspect.

[ewmon]

Thank you all for your comments and information. The result of this situation was that the work (or maybe "contract" more appropriately describes this arrangement) went to someone more intimately associated with the person, and my friend felt too uncomfortable with the arrangement that he would have rejected it.

[Phi for All]

Depends on how it happens. If it's a personal payment, there is no tax write-off. I don't know how a business would be able to give a cash gift to a person, so I was assuming it wasn't.

 

I didn't see this as taking advantage of the unemployed friend. I think it takes advantage of all taxpayers who don't cheat the system.

I was talking about this "'financial gift' in lieu of wages", just as the title of the thread says. Wages get taxed and written off. I had assumed the "arrangement" was to establish the relationship where a "financial gift" would be appropriate.

 

And I agree. It's not ethical no matter how legal you make it if both parties are neither real friends or family. The intent is to avoid taxes and that makes it wrong.

 

I am not a tax lawyer - but I wouldn't relish arguing your first point with either HMRC or IRS and claiming they needed to show a direct causal line. I reckon they would charge you tax at emergency levels and then ask you to prove that the money received had nothing to do with the work done. Revenue departments tend to have fairly draconian powers (that most of the time they eschew) - but in situations like this I think they might well be able and be willing to reverse the burden of proof.

 

The tax authorities being alerted to the fact is a much more difficult area - for a sum as small as 10k I cannot see how this would come to the revenue's attention without someone dropping them a hint; but many honest tax-payers do hate being cheated (and that is what is happening) and they might take advantage of the anonymous tip off lines that are available. I am pretty sure that any revenue service will disagree about there being little link between a gift and pro bono work - if the gifts are every year and the work is a one off (or vice versa) then it could make sense, but if both the gift and the work are unusual and contemporaneous they would try and charge you, no matter your protestations. I would be very surprised if there isn't precedent on this matter in both UK and USA - but my academic westlaw subscription has lapsed and I cannot afford a personal one.

 

Whilst it might not benefit the friend financially to pay above the board (ie won't be able to put it against income to lower profit and thus tax) it will definitely reduce the liabilities (employers contribution etc) and responsibilities that an employer has to an employee and to the government. It is, in the end, a nice cosy agreement between friends; but in the UK (and from what others have said) in the USA it would be evasion of tax and thus morally and legally suspect.

In the first place, to make your relishable argument, you already assume the revenue service knows about the work done. I said it would depend on whether the work in question was observable. And in the second place, you moved the goalpost. Nothing indicated directly that this would be an ongoing arrangement, except perhaps the + after $10K (which I had assumed reflected the increase in the personal gift ceiling for 2011).

 

And I still say that the wealthy person would be much better off with the write-off on taxes than with any reduced liabilities or responsibilities. $10K for a year's work wouldn't even qualify for full-time benefits. The wealthy person could easily pay the amount as contract labor which would require the unemployed friend to file it as miscellaneous income, making him solely responsible for the all taxes, including Social Security and Medicare (self-employment tax).

 

Thank you all for your comments and information. The result of this situation was that the work (or maybe "contract" more appropriately describes this arrangement) went to someone more intimately associated with the person, and my friend felt too uncomfortable with the arrangement that he would have rejected it.

I think your friend is better off. I wish him well in his job search. And you're better off knowing that the wealthy person is not the supposedly very ethical person you thought him to be.

 

Can I ask one final question? What was the relationship between the wealthy person and your unemployed friend? Were they also friends? This doesn't make much sense if they weren't.

[imatfaal]

In the first place, to make your relishable argument, you already assume the revenue service knows about the work done. I said it would depend on whether the work in question was observable. And in the second place, you moved the goalpost. Nothing indicated directly that this would be an ongoing arrangement, except perhaps the + after $10K (which I had assumed reflected the increase in the personal gift ceiling for 2011).

 

And I still say that the wealthy person would be much better off with the write-off on taxes than with any reduced liabilities or responsibilities. $10K for a year's work wouldn't even qualify for full-time benefits. The wealthy person could easily pay the amount as contract labor which would require the unemployed friend to file it as miscellaneous income, making him solely responsible for the all taxes, including Social Security and Medicare (self-employment tax).

 

The authorities knowledge of an action cannot have any weight on the illegality of that action - merely on the chances of prosecution. On the ongoing nature - I was trying to show that if one of the sides of the arrangement was ongoing and the other unique that it would be difficult to draw a link between them; but if either both were on-going or both one-off then the link is more readily apparent. The second section - 10k for a piece of work could well be charged as a one off fee by either an individual or a corporation, 10k to a 9-to-5/M-to-F will always be presumed to be employment; frankly the impression I get is a hark back to very old class distinctions, if you pay someone 10k to redesign your garden it is a fee, if you pay them 10k to mow the lawn it is employment. As it will both increase tax revenue and protect the individual a presumption for employment over a contract for services will often be made - even if a service contract is in evidence.

[ewmon]

What was the relationship between the wealthy person and your unemployed friend?

They had a mutual friend (supposedly ethical too) who was instrumental in brokering the deal and who, had the deal gone through, sounds like he might have had a part to play in the "financial arrangement", so he's not so ethical either. For someone who asked about the "observability" of the work, it was a kind of telecommuting work, so it couldn't be observed. Turns out that the work was given to the wealthy person's brother or brother-in-law (the details are a bit sketchy).

 

Thanks again, everyone.