Pay Dirt

Our Family Just Scammed My Daughter Out of All of Her Summer Earnings

She’s devastated.

Young girl holding a baby in her arms.
Photo illustration by Slate. Photo by Photodisc/iStock/Getty Images Plus. 

Pay Dirt is Slate’s money advice column. Have a question? Send it to Lillian, Athena, and Elizabeth here(It’s anonymous!)

Dear Pay Dirt,

My 16-year-old daughter was promised her adult stepsister’s old car if she babysat all summer since her child care fell through. The plan was the husband would keep his work truck, she would get the newer model, and the car would go to my daughter. Neither my ex nor I could afford (or even find) a car for our daughter in our area. Between rent increases and higher gas prices, everyone’s budget is bursting.

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Now, the husband lost his new job so according to my ex’s new wife and her daughter, they can’t possibly keep up their end of the bargain. They need both vehicles now and they can’t pay my daughter the thousands of dollars they owe her for babysitting. My daughter is devastated. I am furious and at a loss for what to do.

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My daughter was getting up at 6:00 a.m. during her summer vacation in order to take care of a fussy toddler so her stepsister could work. She turned down other jobs because she thought she was getting a car at the end of August. My ex claims there is nothing he can do and it isn’t the end of the world if our daughter has to ride the bus. We have always had our differences but we always put our daughter first.

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—Not a Caregiving ATM

Dear Caregiving ATM,

This situation is sticky because family is involved. But no matter how sticky the problem, your daughter had a verbal (hopefully, also written) contract with her stepsister, and her stepsister breached the contract. In labor terms, this is wage theft.

In fancy financial terms, what your daughter and stepsister had is a forward contract. A forward contract is an agreement between a commodity producer (i.e., a wheat farmer) and a commodity buyer (i.e., General Mills cereal). The two parties will agree on a price and quantity ahead of time. The market price of wheat may change between signing the contract and delivering the product, but the agreement must still be honored at the original price. The two parties assume the credit and trustworthiness of one another. In this case, your daughter’s contract was as the “producer” of babysitting, and her stepsister was the “buyer,” for the agreed-upon price of the value of a used car. Your daughter held up her end of the bargain, but her stepsister did not. The trust was broken.

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If this weren’t her stepsister, I would recommend filing in small claims court for the total cost of unpaid babysitting. But because this is a family matter, your daughter can offer to compromise without escalating to the courts immediately. It’s not fair she turned down other paying work all summer and looked after her step-nephew while her stepsister worked for pay.

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Because the used car market has gotten so wild and someone lost their job, a car might be out of reach. But her stepsister should pay her what she owes: the car’s blue book value, or what she would’ve paid for child care otherwise. If she can’t afford it upfront, put together a written contract for payment in installments. Or get creative with repayment— perhaps your daughter gets specific car privileges, such as on Saturdays or evenings, and her stepsister bears the cost of adding her to the car insurance. Your daughter might get her own car later than planned (prices are dropping, finally), but she should get compensated for her work. And next time she babysits, make sure she gets paid right away in cash— instead of promises. Assurances built on broken trust don’t pay the bills.

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Dear Pay Dirt,

My husband had a tumultuous relationship with his family and decided to cut off communication with them to protect his mental health. He recently started a new job, and a background check showed that he had been listed as a resident of his parent’s hometown in Ohio as recently as 2015 when he had relocated in 2009. We suspect they were claiming him as a dependent on their taxes or something similar during those years when he was living independently. We were married in 2013 and began applying for mortgages in 2016; we suspect they stopped declaring him when they realized we’d be examining our finances.

We have two children, and when they were born, his parents claimed they were setting up 529 accounts for them. We provided them with the children’s social security numbers in order to set these up. When we cut off communication, we just assumed we would not have access to those funds down the line. But now, with the thought that his parents may have acted unethically, we’re concerned that they have access to the children’s information. Is there anything you recommend we do to protect our children’s privacy and financial future? Perhaps running a credit check or freeze? Also, is there any way to find out if the 529s were ever established, and whether the children might have access to those funds eventually?

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—Next Gen Financial Issues

Dear Next Gen,

It sounds like you have other reasons to believe your husband’s parents acted unethically, but background checks for residence do not prove they claimed him as a dependent to the IRS. Background check services aggregate data from several sources. His residency could be off simply because he delayed getting a new driver’s license or registering to vote in his new location. However, if he was double-claimed, the IRS should have sent a CP87A notice to both him and his parents and investigated who was entitled to the claim.

Even if they didn’t commit dependent tax fraud, estranged unscrupulous relatives with access to your children’s social security numbers are a serious identity fraud risk. You should take steps to protect your children’s financial data: freeze their credit with the three major credit bureaus and implement an Identity Protection PIN with the IRS for their social security numbers (and your husband’s). You also want to run a free credit check at annualcreditreport.com on their SSNs to verify no debts were opened in their names. If you discover they’ve already been the victims of fraud, report this at  identitytheft.gov and to the credit bureaus. Report any tax related-fraud to the IRS.

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Regarding the 529 accounts, the person who funds the account owns the account, not the beneficiaries. Therefore, the contributor can change the beneficiary to any family member they wish. Your children should not plan to see the money in those accounts.

Dear Pay Dirt,

My husband’s mother just passed away and left some assets, under $500,000 total. The only remaining family members are my husband “Jim” and his brother “Steve.” My MIL was a vindictive person who left Steve only a fraction of her estate while Jim will receive the rest. This is all laid out in her will.

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Steve was excluded only because of my MIL’s pettiness and cruelty. Steve and Jim are all that’s left of the family, and Jim would like to do right by Steve and split the estate down the middle. However, first, the trust will get distributed in the manner prescribed by the will, which means Jim will need to cut Steve a low six-figure check.

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Are we opening ourselves up to any tax implications by giving someone such a large amount? (I’m putting myself in here too since we are married, filing jointly.) If so, is there any way to avoid those implications? Jim just wants to make this right, but we want to minimize the consequences. This is a HUGE amount of money for us and for Steve.

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—Please Don’t Let This Be a Monkey’s Paw

Dear Don’t Let This Be,

I’m glad you’re willing to consider Steve in the estate division. Your mother-in-law is gone, so don’t let her vindictiveness poison your husband and his brother’s relationship from beyond the grave.

Luckily, you probably won’t be subjecting yourself to many issues other than some extra paperwork at tax time. You must fill out the IRS form 709, the “gift tax” form. You may need to fill out some additional state tax forms. But you won’t owe any additional taxes when you file—and likely never will. This gift will only cost you more in federal taxes if you have a terrific turn of fortune and die with a joint estate greater than $24.12 million (or have given that much in gifts over your lifetime). In this case, you’ll have the funds to hire a team of lawyers and use other options to sneak around the estate tax.

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It’s worth ensuring that the inheritance won’t affect your or Steve’s eligibility for any subsidies or benefits. Generally, lump-sum gifts or inheritance will not count toward your income. But a big cash infusion can make you ineligible for asset-tested programs like SNAP, certain types of Medicaid, or financial aid. If you rely on any of these benefits, you’ll have to be more strategic about when you get the income and how you structure it (such as utilizing a Medicaid-compliant trust).

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Dear Pay Dirt,

After spending nearly all of my adulthood working in low-paying jobs in the arts, I borrowed about $10,000 from a friend to start a small business last year that is tangentially related to what I used to do. (Think watercolorist who now makes more money running an interior design business.) It went surprisingly well—I’ve paid off the loan with interest, hired employees, and have about $10,000 profit sitting in the account.

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It’s an S corp, and I’m the sole shareholder. I pay myself about $2,500/month in addition to working some other jobs for other people. I understand that I have to keep paying myself what would be considered a normal salary, but I’ve also heard that I should “zero out” with expenses at the end of the year so that I don’t pay taxes on profits. I have a big personal project that I’d like to pay for next year. How do I pay myself that money before the end of the year? It’s not my normal wages, so it shouldn’t be taxed the same, right? And what if I want to profit-share with my employees? That’s different from a bonus, isn’t it? The business is still small and simple enough that I don’t have a regular accountant who I can ask about this. I’ve been able to do everything myself/on Quickbooks with a bit of help on tax form prep from a somewhat expensive service online. I know I’ll need to get one eventually, but for now, I just want to be able to put my money to use and give something back to my employees!

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—Artist Not Starving

Dear Not Starving,

Congrats on growing your business and on all your success in your new endeavor. You are correct that the IRS asks you to pay yourself a “reasonable” W-2 wage before taking an owner’s profit distribution. You can set any compensation package for yourself as an employee-shareholder that includes a mix of salary, distributions (“owner’s draw”), and bonuses. Bonuses are taxed the same as salary, but owner’s distributions save you money—they’re taxed as regular income rather than self-employment income. A common strategy for S corps to divide compensation is to split revenue 60-40—60 percent as salary and 40 percent as owner’s draw. However, this strategy isn’t foolproof because of the IRS’ “reasonable salary” test. If your revenue is low and you take a below-market salary (or even sub-minimum wage), the IRS might raise eyebrows at 33 percent owner’s distribution of $10,000.

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The IRS has a list of factors it considers when determining salary expectations. The BLS wage data chart is a helpful resource containing average salaries for over 800 professions. It’s also beneficial to track your time spent working on the business. If you work 500 hours a year for $30,000, the IRS would consider that more reasonable than if you work 2,800 hours a year for $30,000.

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Investing in accounting is hard for many small business owners. Still, I recommend searching for an accountant who understands S Corp taxes and has the skills of a teacher. Even if you cannot hire them to do your books monthly, paying for a session to review your books and discuss your tax and compensation strategy will likely pay for itself. You may even be able to distribute the $10,000 to yourself as a loan or “return of capital to owner,” but it’s challenging for me to answer without seeing your books. They can also assist with weighing different profit-sharing options and setting up the trust paperwork for such a plan. You’ll need licensed assistance to set up a tax-advantaged plan like a 401(k) or SEP-IRA with a profit-sharing component (incidentally, what I do at my day job). Remember, paying for an accountant is a tax-deductible expense for your business.

—Lillian

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