Can you pay an employee their salary and a consulting fee?

Advisors, have you had a client ask you if the technique of paying consulting fees is better than paying payroll or gift tax? Krystal and Merrell discuss what is legal and tax efficient, using the following example.

The New York Times matched a consultant payment of $747,622 deducted by President Trump to an income item on Ivanka Trump’s disclosure forum. The payments allegedly were for consulting work on projects that Ivanka already was being paid for as an employee.

Timestamps

:45 – Family owned businesses have recently asked if they can pay family members on the payroll as executives, and also pay the same family members a consulting fee for the same project.

1:12 – Families very often are looking for ways to transfer wealth from one generation to the next. Only a couple of ways to do this. You can pay a family member compensation which is subject to income taxes and payroll taxes but may be deductible as a business expense, or you can gift money to a family member, subject to gift tax.

1:50 – Krystal discusses her experience with families wishing to pay salary and gift but not layer salary and consulting fees.

2:19 – Merrell reviews President Trump and the fees to Ivanka.

3:30 – Using a $1m salary example, we look at deductions, payroll taxes, the child’s income taxes and payroll taxes. Is it less than the gift tax if they’d have made a gift of a $1m? It depends on whether or not it’s a taxable estate.

6:10 – What if the estate tax rate goes down under President Biden?

7:15 – Krystal and Merrell examine the business deductions assuming an example of an unreasonable payment (in excess of $1m). Breaking compensation into different categories doesn’t help.

8:50 – It’s about sitting down with clients and helping them work through the math. What is legal, and what is the most tax-efficient way to transfer wealth?

9:20 – It takes a village. We, the CPAs, the estate tax attorneys, the business tax attorneys, the financial advisors – we need to work together to do the math to get the best result for our clients. Each of us has a piece of the puzzle, and when we put the pieces together, it is so much better for our clients.

Resources

NYT Trump tax records

CNN Ivanka Trump’s categorization as a consultant

Is your consultant really your employee?

Florida Payroll Tax Calculator

Net Investment Income Tax

2020 Tax Brackets

Section 162(m) Proposed Regulations 

Limits on Deductions for Executive Compensation

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