Forms of compensation

[MRM]

Hi everyone.

From a tax, legal, and ethical standpoint, what can be called, "compensation?"

I'm working part time while in school to bring in enough money, basically, to pay for gas. Let's say I make $300/month on the average.

What if I were to approach my employer (a small engineering firm) and ask for a company gas card in lieu of a paycheck? What are your immediate thoughts about that? Is anyone aware of the cutoffs for compensation?

Or another option: What if I ask them to directly pay my health insurance in lieu of a paycheck?

For the business owners out there, is there any benefit to you as well in either of these scenarios?

As another way to ask this question: How is it decided in any engineering firm that an employee will be paid x dollars per year, and that it is ok from a tax, legal, and ethical standpoint to give them a company car worth $x/year and medical insurance worth $x/year?

 

[PeterKsiazek]

Depending on your jurisdiction you may still be required to pay taxes. In Canada such 'perks' are considered taxable benefits and they are taxed as if they were income. Even collecting of frequent flyer points (Airmiles/Aeroplan) is considered to be a taxable benefit. A friend of mine recently had the taxman come after him because he was using company truck for personal trips without claiming the benefit.

It will all be fine until the taxman finds out!

 

[BJC]

I do engineering. When I get a Tax question I seee my accountant.
Everything ( money, marble, chalk, movie tickets, etc. )you get for doing work is taxable.
If you get a car to drive doing your work that's not taxable, if you drive it home that part is.

 

[zdas04]

MRM,
Let's assume you are in the U.S. There are two possible scenarios. First, you are an employee. Second, you are a contractor.

In the first scenario it is illegal in the "Land of the Free" to pay someone solely in kind. The reason for that is that the employer is required to send 7.5% of what you make to Social Security and deduct another 7.5% from your paycheck. If you get paid 100 gallons of gasoline, the IRS would very much resent having 14 gallons gasoline show up in their Salt Lake City offices--I think the FBI might get involved. It is ok to have a nominal salary and the rest of your compensation be made up of perqs, but there has to be a cash salary for an employee.

In the second scenario, a compensation agreement between two companies is whatever they decide to make it. If you set yourself up as a contractor then your compensation can be a gasoline card, pre-paid insurance, or Polish Hams (McDonald Douglas once sold a DC-10 to Poland for a huge number of hams, Douglas gave them to employees as part of a Christmas bonus, they were really good). The tax law is pretty clear on this one--the receiving party has to declare the fair market value of the gas card as income, pay income tax on it, and pay a 15% "Self Employment Tax" to replace the Social Security hit mentioned above. If you're making $300/month, you probably don't pay much tax, but the IRS gets really cranky about receiving estimated taxes periodically and getting the appropriate tax forms submitted. This scenario might reduce your employer's costs and increase your apparent compensation, but in the long run it is an illusion.

As long as you're not trying to defraud the tax man, there are no ethical considerations to being paid in-kind instead of in-cash, but the benefits are so small that it is rarely good economics.

David Simpson, PE
MuleShoe Engineering

http://www.muleshoe-eng.com

Please see FAQ731-376 for tips on how to make the best use of Eng-Tips Fora.

Remember, being ignorant isn't your fault; staying ignorant is.

 

[IRstuff]

As you are still in school, it's unlikely that you could be considered a contractor, so your expenses are not deductible. However, your company can certainly reimburse your expenses within the limitations of their own policies and procedures. If you are making that small an amount, you might consider dumping all of it into a normal IRA or Roth IRA, which would at least defer any tax liability until you withdraw the money at retirement.

I know that it sounds premature to be dealing with retirement, banking even $5000 into a retirement account could give you about a million at retirement.

TTFN

FAQ731-376

 

[greenone]

Why would him being a student preclude being considered a contractor? There are standards such as who decides when, where and how the work gets done that determine whether or not a person can be considered a contractor vs an employee (The IRS has a fact sheet on this topic).

From a small business point of view, I think it's easier to pay the part timer in money, pay the payroll taxes, and let the worker deal with filing for a refund.

 

[TheTick]

When I was a student, I barely made enough money to be taxed.

 

[MRM]

Well, it was wishful thinking on my part, but I thought it'd be worth asking. After all, since we're already paying about 20% in taxes on a gallon of gas, in some parallel universe, maybe that's enough! Actually I missed all the good advice I always get on Eng Tips so I needed to ask something now that I have a brief respite from my studies...

Now someone mentioned that in Canada, every benefit you get is taxed. I hadn't really thought of this until now, but while I was working full-time, my health insurance (part paid by the company and part paid by myself), wasn't taxed that I know of. It never appeared on my W2 anyways. And in fact my portion of the health insurance payment came out of a Section 125 plan so the dollars were pre-taxed. Could this be something that, gulp, wasn't taxed? And if that's the case, how can a company or individual get away without paying taxes on it? It can be a significant sum of money.

As for my situation, it's rather unique (just like everyone elses...). With my combination of reasearch assistanceship and fellowship, my family and I are living pretty close to the poverty line. However, we still own and rent out a duplex in another state. With the rent we receive from that, by the government's definitions, that makes us pretty well-off. So well off that if I make any modest amount of money over what I bring in now, I lose certain financial aid packages. So even though I want to continue to contribute to my company and perhaps society, and provide my family with some beer money-I mean gas and food money, unfortunately I can't do that in our current situation.

As a side note, 100% of the money we receive from the duplex (plus a little more of my own) goes to the mortgage. One could argue that one day I'll make my money on it, but with the major correction to the housing prices and the amount of continuous maintenance that needs to be done, I doubt I'll ever realize any profit. That's nothing the government is concerning themselves with though because it's my problem.

 

[IRstuff]

You need to look at any direct deductions you can get for 401K, etc., particularly since these are pre-tax, and some companies will partially match your contributions. The pre-tax income does not show up in your AGI.

TTFN

FAQ731-376

 

[SomptingGuy]

I think you'll find that even bog roll is taxable in the land of the free.

- Steve

 

[controlnovice]

Ask to be paid in cash....under the table.

______________________________________________________________________________
This is normally the space where people post something insightful.

 

[JLSeagull]

Let the employeer deduct the taxes; and file the return to get the money back.

 

[MRM]

Once again, even if I make $2,000 extra over the course of the year by doing my odd engineering jobs, I'll be giving up perhaps $10,000 in my grad student award money. So if I would be losing $8,000 regardless of whether I get the money back (taxes paid in) after tax time.

Now if I work extra extra hard, I can make $12,000 over the course of the year, giving me the original $2,000 extra that I'd like to have plus pay for the $10,000 myself and say "no thanks" to a portion of my fellowship that I've been awarded from the university. This is fine with me since I don't mind hard work, but it would take many hours away from my playtime with my new daughter. The money would need to be earned when I'm not studying too, which doesn't leave a lot of time.

Ideally, the cash under the table is the only way to do this and obtain the extra $2,000 per year I need for gas, but my employer isn't willing to do that, and I'd be uncomfortable with it too.

You can see the dilemma...

 

[MRM]

Another idea I just had: Do something totally unrelated to engineering where I could get paid under the table and not feel too guilty about paying my fair share. Some ideas:

1) Play my guitar on the street and collect a little cash

2) Collect pop cans (not SODA cans)

BTW, Cass, how are you usually paid to dance for your gigs? I've been told I can really move out on the dance floor. Maybe I can also belly dance too. People will pay me not to do that!

 

[cry22]

I see that in Canada, they make you pay for borrowing a truck.
Down here, in the land of the free, I have heard of a striper who successfully deducted $15,000.00 for breast implants.

Why don't you just become an employer with an S-corporation? You will be deducting a great deal of your miles, your home office, etc. probably will add up to more than your gas money.

 

[MacGyverS2000]

To get more tips, a stripper with the stage name "Chesty Love" decided to get breast implants to make her a size 56-FF. A tax court judge allowed Chesty to write off the cost of her operation, equating her new, um, assets to a stage prop.

¡Aye Dios mio! 56-FF! Anything more than a handful and you're risking a sprain...

Dan - Owner

http://www.Hi-TecDesigns.com

 

[JLSeagull]

Don't publish on the web that you want to earn money in an illegal manner. It could show up later when you least expect it. You asked about legal and ethical. Deal with ethics or avoid ethics but don't ask someone for an unethical method that feels ethical.

 

[DRC1]

Employer provided cars are a taxable benifit. Light trucks on the other hand, are seen as a tool and are not taxed if their use can be justified. depending on the field of engineering that may not be too dificult. Also you can establish a flexible spending account for you family's medical expenses, which is contributed to pre tax. a similar arrangement exists for child care. tAlk to your employer's CFO about what options may be available.

 

[RVSWA]

With regards to avoiding taxes, there are two ways to do this, the legal way, through deductions and then there is the other way. I have a close friend who is an IRS auditor and we've had many a beer over his experiences. If you want to outsmart him you're gonna have to switch degree's, and then it's really only a matter of time or chance before someone involved in your ring gets audited. Qin = Qout Someone mentioned an accountant, they can help you maximize your deductions.

 

[plasgears]

I did eng work during eng school. I had a part-time job in the mech machine shop. This guy came off the street and asked for design work for a device to help his invalid wife. I provided drawings; he manuevered me down to a pittance. He complained that the device was heavy. We both got our just rewards.

Don't do it!