- quote -

Any reason this company wasn't converted to S-corp status to
avoid this problem?

I don't know how much of a profit the company made nor how
much salary the sons took, but you may want to opt to pay
each of the sons a bonus if they are already over the social
security limit and have the sons gift some of their money to
their father. They could also pay him as a consultant and
1099 him if he qualifies under that scenario.

--
Robert J. Romano, CPA
99 Massachusetts Avenue-Suite 4
Arlington, Massachusetts 02474-8600
www.romanocpa.com

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

"Mark Haymore" <mark[at]youronlinecpa.com> wrote:

- quote -

He is either an employee for this consulting or his is not.
If he is an employee, than nothing you pay him outside of
pure fringe benefits will be exempt from FICA. If he is
not, then he gets the privilege of paying SE tax on the
income.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

Mark Haymore wrote:

- quote -

If you are paying Dad for services and the money is not
going into a qualified plan as an employer contribution,
there's no easy way I can see to avoid triggering FICA tax
and inclusion in Dad's income.

The second problem will be to make sure you don't have an
unreasonable compensation issue in the year of payment.
Normally this is a documentation issue--you need to show
it's reasonable to pay Dad these sums, arguably because they
are directly tied to his services.

- quote -

Well, yes and no. The "magic" of the qualified plan is
that the employer gets a current deduction while the
employee doesn't include the amount currently in income.
The problem, as noted, is that you have to meet
discrimination rules and cover other employees.

Nonqualified plans eliminate the need to cover other
employees--you can do pretty much what you want, so long as
you continue to have reasonable compensation. But what you
give up generally is the broken link between the timing of
the deduction for the employer and the inclusion in income
by the employee. As well, you generally also lose the
exemption from FICA taxation, though you can still gain an
advantage from being able to have the present value entirely
FICA/Medicare taxable in one year even though the income tax
deduction/inclusion takes place as paid.

However, in your case the problem is a current income tax
deduction for the corporation--and that's not going to be
solved by a nonqualified plan generally. A reasonable
employee (even Dad <grin> ) would take cash generally if the
amount has to be included in his income--and, as noted, it
generally is going to need that inclusion to be deductible
to the corporation. So the simplest solution is to bonus
out Dad.

A nonqualified plan fits better if you want to be able to
pay out amounts evenly to Dad in the future, but are looking
to accumulate in the corporation for now and/or want to
minimize long term FICA costs. Even then, you need to have
a real deferred compensation plan--so generally you have to
plan ahead. And be careful of the "Top Hat" filing
requirements under ERISA--they are fairly easy to comply
with, but also easy to overlook.

--
Ed Zollars, CPA
Phoenix, Arizona

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

"Mark Haymore" <mark[at]youronlinecpa.com> wrote

- quote -

Making payroll includes also paying the FICA and medicare
tax (along with state and federal unemployment).

- quote -

Sure. They all are based on ~wages~ paid, so you can, in
fact must, do payroll to get a defered benefit plan.

Look at some kind of age weighted plan to pump the mostest
to dear 'ol dad.

--
Paul A. Thomas, CPA
taxman at negia.net

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

Hi, I am seeking advice for the following scenario: Dad
starts a C-Corp many years ago and passes shares to sons.
For the past 5 years or so Dad "consults" the new owners but
receives no compensation.

1- The company has become quite profitable. Their tax year
is about to end with a nice profit.

2- The sons would like to reduce or eliminate double
taxation.

They like the idea of paying Dad a big lump sum and gaining
a deduction. The question is:

Is there a way to pay Dad without triggering Fica tax and
still have a deduction for the company?

Is some type of non-qualified deferred benefit plan an
option?

They have several employees and contribute to a simple IRA
but arn't excited about doing much more with qualified
plans. Dad would prefer retirement money rather than a lump
sum taxable amount.

Any advice or comments would be appreciated.
Thanks,
Mark Haymore, CPA

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->