General Inquiries

"nonworking" family members still on company payroll

  • 1.  "nonworking" family members still on company payroll

    Posted 19 days ago
    CFMA Group,

    A friend of mine reached out to me the other day posing a question to me. I told them I would reach out to the CFMA group and see what I could find out with the greater exposure of this group.

    She mentioned to me that the owner of the company she is working for is keeping family members on payroll who no longer "work" at the company. She mentioned that the owners wife (who used to be the office admin) had been on payroll for the last 2 years at her normal 40K amount but had not come into the company office in over 2 years and that the owners son was also on payroll (for 30k), even though he was no longer living at home and was now off to college and was never "at work".

    Is this common or normal? Is this ok?

    Thanks




  • 2.  RE: "nonworking" family members still on company payroll

    Posted 18 days ago

    I assume you have 100% owner situation.  If that is the case, no, not entirely unusual, and the owner can pretty much do what he wants to in that regard.  May have a tax issue however.  If the IRS were to audit, you may have a constructive dividend issue, if the company is a C corp. Obviously this is not a good thing from a company profitability and morale standpoint, particularly if you have folks that have incentives tied to company profitability.

     

     

    Robert McManus

    Chief Financial Officer

    Direct: 404.965.9349 

    Main: 404.361.5154 | Fax: 404.965.9355

    PO Box 45717 | Atlanta, GA 30320

    www.msrs.com

                

     

     

     

     






  • 3.  RE: "nonworking" family members still on company payroll

    Posted 18 days ago
    Jordan,

    I echo the comments made by Robert M. and, to add to his point on how common it is, I observed this in many organizations within the state of Texas during my previous public accounting life.

    One area for your colleague to pay close attention to is the FLSA requirement that the individual must perform legitimate services for benefit of the business. Additionally, consideration should be given to compliance issues tied to any company provided health benefits that they may be receiving. Should the insurance provider choose to perform a premium audit, they have the right to back charge the company for any differences in premiums and/or suspend the entire group's coverage for having members classified as employees within the group (who do not perform a 'legitimate service' for the business) rather than as spouses or dependents.

    Regardless of the rationale, it is a slippery slope that can lead to audit from various facets. The key to keeping it 'legal' is to have the individuals contribute to the business as some level and keep a good paper trail. Examples would be networking (local or remote), social media (can be done remotely), "runner" duties (mail, refreshments, etc.) of any frequency, paper shredding, or envelope stuffing.

    Hope this helps, best of luck to your colleague!

    Kyle Davidson

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    Kyle Davidson
    Controller
    Tyler TX
    (903) 592-9311
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  • 4.  RE: "nonworking" family members still on company payroll

    Posted 18 days ago
    I have worked for a number of companies that this has been common place especially if it is an S-Corp.  The wife and son are paying taxes on the money they "earn" and at the end of the day, the owner is the owner.  It's his profit to do with what he wants.

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    Cynthia Dean
    Finance Manager
    Nevada General Construction
    Las Vegas NV
    (702) 254-0262
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  • 5.  RE: "nonworking" family members still on company payroll

    Posted 17 days ago
    Very common in a variety of closely held clients that I have worked with over the years in banking.  A good point was made about making sure that your incentivized employees are measured without accounting for the family salaries.  In construction this is typically done at the job profitability level.

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    Greg Robinson
    Senior Vice President / Corporate Banking
    Umpqua Bank
    Sacramento CA
    (916) 341-7540
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  • 6.  RE: "nonworking" family members still on company payroll

    Posted 17 days ago
    Not uncommon but the company definitely has a tax problem.  A pre-requisite for any tax deduction is that the expenditure be "ordinary and necessary".  As these people are not working for the company, the expenditures are neither ordinary or necessary, and therefore are not deductible by the company.  However, the "income" to the individuals is actually taxable as a business is incapable of making a gift to an individual.

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    James Burnett
    Chief Financial Officer
    W.M. Jordan Co., Inc.
    Newport News VA
    (757) 596-6341
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  • 7.  RE: "nonworking" family members still on company payroll

    Posted 17 days ago

    Good point on the ordinary and necessary issue.  Could have a tax problem regardless of S Corp or C Corp.

     

     

    Robert McManus

    Chief Financial Officer

    Direct: 404.965.9349 

    Main: 404.361.5154 | Fax: 404.965.9355

    PO Box 45717 | Atlanta, GA 30320

    www.msrs.com