We are back after a week off.
I was moving house, so packing, cleaning, and scrubbing took preference to our weekly blog. I still managed to indulge in plenty of chocolate on Easter Sunday though! I haven’t gone far, only up the hill in Tramore, so my sea view has gone. I do a bit of running to counteract the sweet tooth. When I come out the door and turn left the first mile is glorious as all downhill. The downside of this is that the last mile home is pure hell. Slower than a slow snail, plodding back up the road hoping nobody sees the carnage.
In our last blog, we spoke about some of the benefits of Holding Companies. In case you missed it Click here
This week we are going to look at family wages. We will focus on payment amounts and what way the payments should happen. We will look at an interesting Tax appeals case from 2016 and the key findings from that.
In a true sense of family business, everyone helps out when they have to. This could be jobs on the farm, collecting glasses in the pub, or behind the counter in a shop. Outside of school hours, at weekends and on summer holidays the son or daughter is keen to get some cash. The parent needs help to get the important jobs done, but they don’t have the time to do them. Training happens on the job and as we know that teenagers are so knowledgeable, they know it all already!
One common question is about pay rates. Wages should be commensurate with age and experience. So, the question is what would you pay a non-family member of similar age and experience to do the same job? The minimum wage for a person under 18 is €7.14 per hour. To see the National Minimum Wage from 1 January 2021 See here
It would be difficult to justify payment of €50 per hour to a teenager who is doing a labouring, admin, or cleaning role. A payment in the region of €10 to €15 per hour would make more sense. That is what you could expect to pay an unrelated person of similar age and experience.
Getting a deduction
The business owner needs to ensure they get a deduction for the expense. In light of this, some things need to be in place to guarantee a deduction.
- You need to operate payroll and put the child on it
- Payment goes from the business account to the child’s account
Revenue will look to see that payroll is being run and that the money leaves the business account to the child.
The child should get a payslip like other employees showing the gross pay and deductions.
To minimise the taxes for young Paddy or Mary they should qualify for the PAYE tax credit of €1,650. If they don’t get that then they can get the Earned Income Credit. The max credit they can get whether PAYE or Earned Income Credit is €1,650. This would mean on incomes of up to €8,250 they wouldn’t pay any Income Tax. Music to their ears! Imagine how more focused they might become in Business Studies if they could find out ways to pay no tax!
|Less PAYE Tax credit||€1,650|
Per Revenue guidance, the following cannot claim the PAYE credit
- The spouse, civil partner, or child of a person paying the income
- The spouse, civil partner, or child of a partner in a partnership
But children of proprietary directors can claim the credit if
- their job is in a qualifying PRSI class
- PAYE has been correctly deducted from their income
- the child gives all their time to the job
- their pay is at least €4,572 per year. You can apportion this figure if they work part-time
For a link to the Revenue guidance on this see here
Remember if they don’t get the PAYE credit, they can get the Earned Income Credit.
This story is from a Tax appeals commission case of 2016 and the main stars are Revenue, JR and his sister Cindy. JR and Cindy are fictitious names as is the practice type as these are redacted in the case. JR has a legal practice and he employs his sister Cindy, who was an employee during the tax years 2012 and 2013. JR claimed a deduction for wages in his accounts of €18,200 for 2012 and €32,800 for 2013. Revenue didn’t allow the deductions on the basis that the deductions were not “wholly and exclusively for the purposes of the trade”
At the hearing JR and Cindy gave evidence. JR had two employees one of which was Cindy. Cindy was in her fifth year in school when she started work in JR’s practice. She did her leaving cert in June 2013. JR confirmed that Cindy worked as an assistant and receptionist. She didn’t have qualifications at that time and was still at school. Her rate of pay was approximately €14.50 per hour in 2012 and €19.50 per hour in 2013. JR stated that “her wages were a reflection of what I think she was worth”
Revenue was of the view that the level of wages for Cindy was much higher than the market value for such employment. This was on the basis that she was a leaving cert student with no qualifications.
Cindy, in evidence, stated she worked for 3 hours after school and worked full days on Saturdays in 2012. Cindy said she worked from about 4 to 7 each day while JR said he closed the practice at 5 or 6 on weekdays. When asked about what tasks she did Cindy said that she carried out cleaning tasks on the equipment. In 2013 Cindy said that she drove to the practice every day. As part of her employment, she collected and delivered packages for the practice. Her wages increased to €19.50 per hour.
JR gave two timesheets in support of hours worked and wages earned by Cindy in 2012 and 2013. These were two handwritten A4 sheets, one titled Cindy 2012 and the other Cindy 2013. Each document had 3 lines of data with a total annual figure representing gross earnings for Cindy. Revenue’s view was that the two A4 sheets contained a negligible amount of information. For them, it was not an adequate record of the dates and times of Cindy’s working arrangements.
Proof of Payment
JR had shown Revenue that he paid his other employee Mary €20 per hour by electronic transfer. Mary got paid weekly and Revenue had no issues with the deductibility of these wages. In contrast, Cindy got paid in cash. During the hearing, JR on his bank statements for 2012 and 2013, showed lump-sum cash withdrawals. The amounts ranged from €500 to €5000, and he said these were to pay Cindy’s wages. In evidence, Cindy stated that the cash paid to her for wages was in the family safe at her parent’s house where she lived. She didn’t receive payslips, nor did she keep a record of hours worked. When asked why she didn’t lodge the cash into a bank account she said that she never owned a bank account, and she didn’t trust banks. She admitted that she had a credit union account but did not lodge the cash to this account. She didn’t trust credit unions and did not use this account.
Revenue repeated its position that taxpayers carrying on a trade or profession must maintain proper books and records. Their view was that there was a complete lack of evidence of actual payment of monies from JR to Cindy. They also took the view that Cindy’s evidence of not using a bank account lacked credibility.
Findings from Appeals Commissioner [AC]
Citing the minimum wage for an adult employee with 2 years experience in 2012 and 2013 was €8.65. The AC accepted the submission from Revenue that the hourly rate for Cindy’s wages was too high. The AC determined that a fair and reasonable rate would be €9 per hour. This was based on the wage rates applicable at that time and that Cindy had no formal qualifications.
Based on the timesheets provided by JR Cindy worked 1,255 hours in 2012 (average 24 hours per week for 52 weeks). And she worked 1,682 hours in 2013 (averaging 32 hours per week for 52 weeks of the year). Given that Cindy was in school full-time during these years the AC did not accept that Cindy worked these hours. The AC took the view that a reasonable amount of hours that Cindy was available to work was 12 hours per week. Based on the hours and the rate of pay the wages for the years were
|2012 50 weeks||12 hours per week at €9 per hour||€5,400|
|2013 47.5 weeks||12 hours per week at €9 per hour||€5,130|
The AC determined that these amounts were allowable deductions in JR’s accounts for 2012 and 2013.
In conclusion, the AC stated that in an appeals case the burden of proof rests on the Appellant [JR in this case]. And that the Appellant must prove his case on the balance of probabilities. The evidence presented by JR was insufficient to support a deduction of €18,200 in 2012 and €32,800 in 2013. The AC noted the deficiency in records and documentation in proof of payment of Cindy’s wages. In particular, the absence of weekly timesheets and payslips went against JR’s claim.
Young Paddy and Mary can be an important part of keeping a family business going. The rate of pay, paperwork, and the money trail is vital. This will ensure you get the correct deduction in your accounts and that they get the cash into their bank. They will always have more value on the money they earned than on the free money from the bank of mum or dad!
Do you need help with your family business? Call Deirdre on 051396703 or start here. Tell us about your business and you and we will try and help.