Sister in Office

[taxea]

Family members can certainly volunteer to work for free, and family members can certainly gift money to one another. The key is, would the work be done for free if no gift of money was offered? And, would the gift of money be given if no volunteer services were provided? If you can’t answer yes to both questions, then you can’t call it a gift.

In other words, the minute strings are attached to the gift, its no longer a gift.

The OP said the sister wanted to be doing "something". That something could have been reading or knitting, etc. She chose to spend her time helping out in the office. I presume she is free to comeo and go as she pleases and is not required to do anything at all. And I never said the gift was tied to the "volunteering".

[Gary2]

... If I pay her on a W2, the state unemployment agency wants a piece of me, the bank wants a piece of me, (they do my payroll and it's only me), the FUTA gets a bite, and the IRS always gets a piece of me.

Will she be able t get some of the unemployment back after leaving? If so, it's not so bad. And wouldn't FUTA be offset by the state unemployment tax, for something this small? Or is your state rate too low?

Of course, the IRS will be getting a smaller bite from you if you have a valid business deduction.

As for payroll, have you considered doing your own? If you keep it simple (e.g. fixed salary throughout the season), you could probably prepare all the paperwork at the beginning of Jan. and just mail it in on schedule. I know you can schedule EFTPS payments in advance, though I'm not sure how far in advance.

She is here for a week, then leaving, then will come back if I need her, which I will...

This gives a bit more weight to the argument that it's just family helping family, and not a real job. Personally, I'd still do it on a W-2, but I'm not rush to judge your decision.

It also makes me wonder if she could benefit from working with a agency that provides temporary office help? I did that for the summer after my freshman year in college, and was only idle for about ten work days, mostly mail room work but some filing; my typing, while good, wasn't good enough for secretarial. (Of course, being in NYC meant unlimited demand for temporary office staff, so this may not be realistic outside large cities.)

[Bees Knees]

The OP said the sister wanted to be doing "something". That something could have been reading or knitting, etc. She chose to spend her time helping out in the office. I presume she is free to come and go as she pleases and is not required to do anything at all. And I never said the gift was tied to the "volunteering".

The fact that the sister is willing to do it for free and is not under any obligation to do anything indicates the money can be called a gift.

The fact that the OP probably would not gift her money if the sister chose to sit and read or knit rather than help out in the office indicates that it is not a gift.

[Lion]

Just a thought...

Perception means a lot in this business to our clients. When they have a friend that they think takes a deduction that we don't include on their return, we hear about it. So you want to set a good example. You don't want your clients to think you're avoiding payroll taxes or taking advantage of your sister. Even if you are doing neither, a bit of paperwork and a few bucks in payroll taxes (which you do get to deduct) might be worth it to present the image you want to present to your public. Now that image might be of a family-friendly firm, so I'm not saying you have to work a certain way or no way. Just think about what your business culture really is, and act accordingly, within the law, where ever that takes you.

[Bees Knees]

Another point to consider is the question is being asked on a message board frequented by tax professionals who are under ethical requirements to uphold the letter of the law. Would I pay my sister under the table to help out in a home office and treat it as a gift? Or ignore payroll tax rules just because it’s easier to do a 1099?

I certainly would not admit to it or ask others to approve of it on a public message board such as this.

[BOB W]

This is what happens when you let emotions get involved in business,,,,,,,,, don't.

[Burke]

If I paid her on a 1099, I would also personally pay her taxes.

But the one thing you do not want to do is make an employment situation where none exists. So under the circumstances you describe, it very well may be construed as not an employment situation. You will have to make that determination.

[oceanlovin'ea]

agree with Burke

I think I agree with Burke in this situation. Don't make this an employment situation when one doesn't exist.
Your sister likes to visit you. If she comes during tax season, you are very busy and so she might offer to help with filing or answering the phone or the door. She didn't come for the purpose of working for you. But if she wants to spend time with you she might as well do something while she is there.
Sisters do nice things for each other. If one has access to more money than the other then we give them something that will be helpful to them, be it paying a heating bill or some thing else to share.
Family help each other out just out of love. That is what I see here. She loves you enough to help you when you are so busy and you love her enough to make sure she is warm in the winter.

Linda, EA

[Davc]

Don't forget Workmen's Comp.

[erchess]

Interesting Discussion Here

I know the person in question is Possi's sister and I fully believe one that Possi is not trying to do anything unethical or illegal and two that because they are sisters one would work for free and the other would help financially without requiring anything in return. I believe those two things because I've come to have a high regard for Possi through our interactions on this board. However, I'm not sure the average auditor at the IRS or State DOR would believe these things. This person would probably not know Possi or the sister and might tend to have a jaded view of business people in general. The person might tend to dismiss what I am sure is Possi's enviable record of compliance with the observation that every major bad actor who is caught at all has to be caught the first time and has a clean record until that happens.

Admittedly the gifting option seems attractive because it avoids a small bit of paperwork at this busy time and it avoids admittedly significant tax bites. Even the 1099 option would involve less paperwork now and a lower tax bite. But on the other hand, if an audit goes against Possi there will be loss of much more time and a significantly increased financial cost. And then as someone else pointed out you have to look at how clients will perceive the situation. Would our answers really be the same if Possi were asking not about herself but about a client who is an MD with such a small practice that she does not have a regular full time office staff but does have a financially needy and very helpful sister?

I also think a contract could be necessary for anyone who is in the office with access to the files. That alone pushes me toward treating the sister like an employee.

[veritas]

Three options have been

Posited.

1. Pay the money through and report on form 1099.

2. Pay the money and report as wages.

3. Pay the money from personal funds.

Number 1. is out.... period There is no way you can claim the sister is some kind of independent contractor.

That leaves 2 or 3. And only one of those is correct.