Category: Compensation and
Employee Benefits Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Taxpayer owns a retail establishment and plans to put his newborn infant on the payroll in connection with using the infant as a model for the taxpayer's advertisements. The taxpayer plans to use the wages generated by this employment as the basis for making an IRA contribution on behalf of the infant. I offer these comments. 1. I think your client is nothing if not inventive. 2. I do not see anything that explicitly says this cannot be done. Clearly, a minor can be an employee for federal tax purposes and earn wages. For purposes of making an IRA contribution, the IRS has established a safe harbor to the effect that anything that is properly reported in the general wages box of Form W-2 can safely be used to support an IRA contribution. See Rev. Proc. 91-18, 1981-1 CB 522. 3. For employment tax purposes, it is clear that the age of an employee is not relevant to the obligation to withhold payroll taxes, except that the wages of a person under 18 years of age in the employ of his or her parents are not subject to FICA tax. Section 3121(b)(3)(A). 4. Superficially, at least, the plan seems to work. Without doing exhaustive research on this question, however, it is my opinion that the arrangement set forth above would not withstand a determined challenge. Even though it seems that the taxpayer's plan is not explicitly prohibited, it has been my experience that the IRS pays close attention to wages paid to family members. It is often the case that the spouse of a principal shareholder ends up on the corporate payroll in order to increase the availability of tax-favored employee benefits. These arrangements are generally scrutinized very carefully to determine that the compensation is for services actually performed and amount of compensation is reasonable in relation to the services. In the context of employee compensation, the predicate assumption is that wages are paid for the performance of services. In other words, in the absence of services, there can be no wages. The definition of wages for income tax withholding purposes, Section 3401(a), provides the term wages means all remuneration...for services performed by an employee for an employer...[Emphasis added.] As far as I can tell, there is no definition for the term services. In my experience, services involve either simple labor or the application of some kind of skill at the direction of (or consistent with the goals of) the person for whom the services are performed. In this case, the taxpayer asserts that a person who is absolutely and totally helpless, a newborn infant, is capable of providing services. I do not believe that is credible. It seems to me that this situation is vastly different from that of a child actor. A child, even a rather young child, can do certain things subject to a script or coaching that have value in a television, movie, theatrical, or advertising context. Here, the employee/model is incapable of doing anything normally associated with the performance of a service: show up at an agreed-upon time and place, comprehend instructions, execute instructions, etc. It seems that it would be difficult if not impossible to make a credible case that such a person is providing a service. I think if this matter were scrutinized, the IRS would view payments to the infant not as wages but rather as payments for the use of the child's likeness. As I understand it, one's likeness is a property right, and payments for the use of such a right are considered as royalties. Royalty income, of course, does not support an IRA contribution. I think the taxpayer's plan is very clever. I think it could work in the future, but not right now while the child is totally helpless. When the child is old enough to control his or her movements, has some language skills, and is able to comprehend and respond to simple directions--stand up, sit down, smile, frown, laugh, move to the left, move to the right, etc.--then I think one could take the position the taxpayer now seeks with some prospect of success. |
