Realtor employment agreement

[sternfan]

Got a new realtor client because his last accountant didn't buy the following:
Realtor, sched c, was advised to adopt a self-insured med. reimb. plan in wifes name who is the employee, so realtor is covered as "family" of employee. All non-insurance reimbursed med exp including over the counter meds would then be deducted on sched.c, empl benefit programs.
The employment agreement is drawn up and under compensation reads:
Employer shall pay employee such salary, bonus and benefits as employer and employee shall negotiate from time to time. Benefits are subject to change at any time with such notice to employees as may be required by applicable employee benefit plans and laws governing them.
Client told me that this is typical arrangement for realtorswho have their spouses perform bona fide work for them. There is no salary or wage being paid to wife, just the benefits above. The wifes work is documented on a time sheet. Net income on the schd C.
Any thoughts?
Great website, good knowledge on this board.
The taxbook kills the kleinrock crap I got stuck with last year.

[Sandytax]

Health Deductions on Schedule C

Yes I use this alot, when I can get the husband and wife to work together. I think it is covered under Section 125. There are independent companies out there that will write up the paperwork and help keep track of all the expenses. I think the cost of the program is $150 a year, well worth it. The stickler is that if you offer it to one employee, you have to offee it to all employees (if there are more than one). These companies will write up terms for you like the employee will be eligible for health insurance after they work so long. They will also back their paperwork and go to any audits with the client on that portion of the return.

[Unregistered]

Section 105 Medical Reimbursement Plan

Yes I use this alot, when I can get the husband and wife to work together. I think it is covered under Section 125. There are independent companies out there that will write up the paperwork and help keep track of all the expenses. I think the cost of the program is $150 a year, well worth it. The stickler is that if you offer it to one employee, you have to offee it to all employees (if there are more than one). These companies will write up terms for you like the employee will be eligible for health insurance after they work so long. They will also back their paperwork and go to any audits with the client on that portion of the return.

I believe it is a Section 105 Medical Reimbursement Plan. However, I'm not sure someone (the wife) performing services without compensation/wages would meet the definition of an employee. I'll be interested in reading other responses.

[rosieea]

I believe it is a Section 105 Medical Reimbursement Plan. However, I'm not sure someone (the wife) performing services without compensation/wages would meet the definition of an employee. I'll be interested in reading other responses.

I, too, would be curious. Since med reimbursement payments under such a plan are excluded from income, this client's wife receives no reportable compensation whatever. Doesn't make sense to me. But, then again, common sense has little to do with tax law.

Why doesn't the guy pay his wife? The salary is deductible; his share of payroll taxes is deductible; it lessens his SE taxable income; it earns quarters for his wife's social security account; etc.

[Bees Knees]

The spouse has to be a bona fide employee [Rev. Proc. 71-588].

Ask yourself, what employee would work for only health benefits? Its not even legal to just pay helth benefits and no cash wages under Federal minimum wage laws. A court would throw the arrangment out and say the spouse is acting as a partner and not an employee.

[JON]

Without Wages??????????

It is used a lot, but never without the spouse being paid. Payroll tax returns, W-2s and the whole nine yards come with employment.

[Armando Beaujolais]

The spouse has to be a bona fide employee [Rev. Proc. 71-588].

Ask yourself, what employee would work for only health benefits? Its not even legal to just pay helth benefits and no cash wages under Federal minimum wage laws. A court would throw the arrangment out and say the spouse is acting as a partner and not an employee.

What employee would work for only health benefits? How about a spouse of the employer who would rather take the wages as benefits rather than being paid in cash? That's exactly what we're talking about here. There's no rule saying the employee-spouse has to be in it for the cash paycheck, as long as it's bona fide employment.

I know some well-to-do people who work for low wages at retail stores. Why would anyone do that if they didn't need the money? The discounts, that's why. The motivating factor in a bona fide employment relationship doesn't have to be the cash paycheck. It doesn't disqualify their employee status.

Being a spouse doesn't disqualify anything. All the same principles would apply to your next door neighbor assuming it's a bona fide employee relationship.

Why would a court throw out the arrangement saying the spouse is a partner? There's no basis for that conclusion. Again, assuming it's a bona fide employee relationship, a spouse is not automatically considered a partner just because he or she works in the business, and certainly not just because the employee-spouse realizes benefits from the employment.

I am interested, however, in your contention that federal minimum wage laws require cash compensation. I did a quick search of the topic and couldn't find that provision. However, if that's true, it would be an important part in setting up a legitimate arrangement.

I have several clients who have this type of arrangement. The fact that the spouse is employed doesn't put any special type of disqualifying factors into the mix. It does, however, put the taxpayer in a situation of needing to plan for the closest scrutiny. In all the cases with my clients, there are cash wages paid, 941's filed, W2s issued, etc. I amconcerned if there is zero in cash wages paid, but only because I think that might kick the return out showing employee benefits on Schedule C with no corresponding W2.

It's no different than employing a child as an income-shifting strategy. Laws specifically allow children employed by parents to avoid certain payroll taxes. Just like this situation, it has to be a bona fide relationship, and if a revenue agent comes a'calling, you'd better have all your ducks in a row including paperwork and strong evidence of actual work performed at reasonable wages. Just because it results in a special benefit for the family doesn't disqualify it.

[Unregistered]

The guy who sets these up for self-employeds says as long as spouse signs employment agreement & performs substantive duties for his business which are substantiated.
The IRS does not require the spouse to be paid in cash. He can pay her in benefits, hence the medical reimb. plan. He also said he has never had a problem on examination in the 20 yrs with his self employed clients.
Great info from everyone, thanks.

[taxmandan]

There's no rule saying the employee-spouse has to be in it for the cash paycheck, as long as it's bona fide employment.

No, but the compensation must meet the state minimum wage laws. Around here that is $7.50/hr. so it would be necessary to track hours worked and the amount of compensation had better be more than minimum.

And I totally agree with Rosieea, the wife needs to be paid a salary for the Social Securty quarters if she isn't working another W-2 job.

[Unregistered]

No wages?

No, but the compensation must meet the state minimum wage laws. Around here that is $7.50/hr. so it would be necessary to track hours worked and the amount of compensation had better be more than minimum.

And I totally agree with Rosieea, the wife needs to be paid a salary for the Social Securty quarters if she isn't working another W-2 job.

I'm confused. It doesn't seem to make sense to me that anyone can be a "bona-fide" employee unless wages are paid. Also, if the spouse is a "bona-fide" employee, why would she be subject to state minimum wage laws, and not federal minimum wage laws? Last, if this type of arrangement violates minum wage laws, wouldn't that jeorpardize the "bona-fide" employee status? Is there an official IRS definition of an employee?

[Unregistered]

Section 105 without wages

The guy who sets these up for self-employeds says as long as spouse signs employment agreement & performs substantive duties for his business which are substantiated.
The IRS does not require the spouse to be paid in cash. He can pay her in benefits, hence the medical reimb. plan. He also said he has never had a problem on examination in the 20 yrs with his self employed clients.
Great info from everyone, thanks.

I just spoke with the folks at AgriBiz Plan. They have been providing services setting up and administering self-employed medical reimbursement plans for many, many years. The firm started providing these services to farmers and has grown substantially. They indicated they will not set up a plan without W2 wages being paid to the spouse. I don't think I would either, I would think "reasonable" compensation would be a requirement.

[Armando Beaujolais]

I'm confused. It doesn't seem to make sense to me that anyone can be a "bona-fide" employee unless wages are paid. Also, if the spouse is a "bona-fide" employee, why would she be subject to state minimum wage laws, and not federal minimum wage laws? Last, if this type of arrangement violates minum wage laws, wouldn't that jeorpardize the "bona-fide" employee status? Is there an official IRS definition of an employee?

The only legitimate question that's been raised here, IMO, is whether a minimum wage payment must be in cash. I'm still waiting for some kind of citation on that. It would make sense, but it would also make sense the other way around.

As to federal vs. state minimum wage laws, some states have higher minimum wage laws. Whichever law is the best deal for the employee is the law that's used.

I see some confusion over the definition of "wages." Just because wages aren't paid in cash doesn't mean they're not wages. That's what a cafeteria plan is all about.

I'm going to try to find out whether minimum wage must be paid in cash. That's a very important point.

That's the only issue in my opinion. I disagree with those who think this arrangement somehow automatically pollutes the bona fide employee status of the spouse. That's just not true. Wrong tree. This is a legitimate technique, blessed in Revenue Rulilng. I know it sets off some practitioners because it seems to good to be true, but it's not, honest. It's just as legitimate as paying a child for labor in a business.

[JON]

Agribus

I am with them. You can interpret any way you want. Maybe gifts insted of wages work. I'll wait until one of you successfully defend your porition that you can be an employee without wages.

[Armando Beaujolais]

I am with them. You can interpret any way you want. Maybe gifts insted of wages work. I'll wait until one of you successfully defend your porition that you can be an employee without wages.

That doesn't accurately represent the argument. Nobody has argued that a person can be an employee without wages. You're setting up a straw man.

The question is the definition of "wages." Let's try IRC section 3121 (employment taxes). "For purposes of this chapter, the term "wages" means all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash..." and it goes on an on.

That's about as much proof as you're going to get, that "wages" can include benefits other than cash. Of course there are probably dozens of definitions of wages in the code. You can't just say "wages" and expect it to apply to every situation.

Then there are wages for purposes of minimum wage. The definition of is different for federal FLSA and has dozens of different meanings for the various states, for unemployment comp, minimum wage, etc., etc.

Once again, the only legitimate question here is whether minimum wage must be paid as cash wages. I don't know the answer, and I've done some digging.

Anyone have a citation that minimum wage must be paid in cash?

[Armando Beaujolais]

No, but the compensation must meet the state minimum wage laws. Around here that is $7.50/hr. so it would be necessary to track hours worked and the amount of compensation had better be more than minimum.

And I totally agree with Rosieea, the wife needs to be paid a salary for the Social Securty quarters if she isn't working another W-2 job.

Here we have apples, oranges, peaches, and tomatoes rolling around all over the place. That's what makes this issue interesting.

State minimum wage laws. Not the same as Internal Revenue laws or federal wage laws or social security laws.

Internal Revenue Code. Not the same as etc., etc., etc.

Social security code. Not the same as etc., etc., etc.

Federal Labor Standards Act. Not the same as etc., etc., etc.

You can't say "It's thus and so for social security, so that means it's thus and so for state minimum wage, tax law, self-employed health insurance for a spouse, etc."