I’ve lately been researching some employer-side tax benefits and binge-listening to an organized-crime-themed comedy podcast, which I’m not going to name because it’s so vulgar that I strongly discourage anyone with a weak stomach or guilty conscience from listening to it (e-mail me if you’re interested), and the two eventually crystalized in my mind the following question: how would you organize a business with the explicit goal of maximizing the total benefits made available to the collective pool of both owners and employees?
This is an interesting question because the employer-employee relationship is traditionally treated as adversarial. Employees ask, beg, plead, and strike for higher compensation and benefits, and employers hire strikebreakers and scabs, enlist the National Guard, and sue, delay, and terrorize in order to pay as little as possible in compensation and benefits.
But there are other models. In the FIRE blogging community, it’s de rigueur to “employ” your kid as a “model” so you can start making Roth IRA contributions while they’re still in the womb, or at least as soon as they have a Social Security number.
And likewise, anyone who has watched the entire run of the Sopranos more than once knows that Tony needs his W-2 from Barone Sanitation. While it observes the forms of an employer-employee relationship, it’s what Baudrillard might call a simulation or simulacrum of employment: an imitation or a replica of an original that has long since ceased to function as designed or imagined.
That eventually made me ask the question: if many of our public programs are designed around an adversarial employer-employee relationship, what would complete employer-employee collusion look like? In other words, if the total pool of profits were shared between everyone at the company, how would you organize the company to maximize the amount of benefits the entire collective received?
This may seem obvious, but it’s important: there is a wide range of methods to distribute profits to employees in ways that are not taxable to either the employer or the employee.
- Dependent Care Flexible Spending Accounts. While many people associate FSA’s with health insurance, Health FSA’s are not available to the employees of firms that don’t offer health insurance. Fortunately, Dependent Care FSA’s are, and have higher contribution limits ($2,500 if married filing separately, $5,000 otherwise). These accounts can only be used to pay for dependent care (not healthcare) expenses, but that includes a wide range of childcare costs for children up to the age of 13, and dependent adults. Anyone with either kind of dependent will no doubt find it easy to find $5,000 in eligible expenses per year, but note that like health care FSA’s, dependent care funds expire at the end of each calendar year.
- Workplace retirement accounts. Our employer-based welfare state affords enormous advantages to employees whose employers happen to offer workplace retirement plans. Obviously, if you have complete collusion with your employer, you’ll both want to maximize your contributions to those plans. Employer contributions unfortunately have to be made into pre-tax accounts, but employee contributions (up to $19,000 in 2019) can also be made into after-tax Roth accounts, semi-permanently shielding the income from taxes on interest, dividends, and capital gains.
- Paid family and medical leave credit. I wrote up this benefit in detail on Tuesday, but the short version is that if an employer adopts a written policy offering 100% wage replacement for up to 12 weeks to all employees making up to $72,000 per year for all Family and Medical Leave Act purposes, the federal government will provide a tax credit credit of 25% of that wage replacement. Without total collusion, this simply offsets the cost of having to accommodate an employee’s absence. With total collusion, the collective can get a tax credit of up to $4,150 per year, per employee earning up to $72,000 (25% of 12 weeks at 100% wage replacement). There is no limit on the number of years or number of times the leave can be taken to be eligible for the credit (up to 12 weeks per year).
Tailor payroll to family size
Because of the way our benefits system privileges employment income, under conditions of total collusion it’s essential to report the lowest possible wage eligible for the highest possible benefits. I’ve written about these “minimax” conditions before, but to review, the most important benefits are:
- Earned income credit. The federal EIC phases in based on both tax filing status and number of dependents, meaning the optimal amount of earned income for each employee is highly dependent on the exact composition of the employee’s household, ranging from (in 2018) $6,800 in income and a $519 credit for a single adult with no dependents to $14,300 in income and a $6,431 credit for a filer with 3 children.
- Child tax credit. The new $2,000 child tax credit doesn’t require as much careful calculation as the EIC, but it still phases in and out, so under conditions of total collusion you’d want to make sure each employee with children has at least enough income to trigger the entire $2,000 credit. The key thing to keep in mind is that $600 of the credit is only refundable against tax liability, so you need to make sure each employee with children has at least $600 in tax left over each year to claim the entire credit.
- Supplemental Nutritional Assistance Program. SNAP, the successor program to “food stamps,” is phased in and out like the earned income credit, and is based on family size like the child tax credit, but has additional employment requirements. Under conditions of total collusion, you’d want to make sure each employee was recorded as working at least 20 hours per week in order to satisfy SNAP’s work requirement.
- Medicaid / Affordable Care Act subsidies. This is one of the most important areas of collusion, because it interacts in such a complicated way with the others. In Medicaid expansion states, it’s essential to keep each employee’s income below 138% of the federal poverty line for that employee’s family size, while in non-expansion states, it’s essential to make sure their income is just above 138% of the poverty line, so they’ll be eligible for the maximum ACA subsidy.
You need a patsy
There’s one big problem you run into right away when developing a conspiracy to maximize the transfer benefits of the welfare state on behalf of a collective: you need an employer. This isn’t the end of the world, but it’s also not trivial: several of the benefits I described above aren’t available to the owners of companies and so-called “highly-compensated employees.” This has some odd knock-on effects under conditions of total collusion.
The highly-compensated employee test is complicated, but a truly committed crime family could find workarounds. For example, if the collective distributed 4.9% ownership to 20 totally unrelated people, then none of those people would meet the 5% ownership test. But, until your collective expands to that many people, you have the problem of assigning ownership to someone who won’t, for example, be able to benefit from Dependent Care FSA’s or certain employer-side 401(k) contributions. That’s fine, but ideally you’d want to rotate the role among people who would be eligible for the fewest work-related benefits. If an “owner” gave birth, for example, you’d want to shift ownership to someone who wasn’t incurring present-year dependent care expenses.
What do you do with the money?
This is sometimes treated as the most complicated part of the conspiracy, but it’s actually the simplest. After all, once the business has completed its payroll, and once the “owner” of the business has taken the distribution of profits, the owner is free to do with that money whatever they wish.
Now, it would certainly be illegal, and I would never encourage or even suggest, that the “owner” of a business “distribute” the “profits” of a “collective enterprise” to its other members as compensation for their labor. Those would be wages, and would need to be reported to the appropriate authorities, with appropriate state, local, and federal payroll taxes deducted and withheld.
But hypothetically, under conditions of total employer-employee collusion, whomst amongst us has not made periodic transfers to our friends, relatives, and co-workers? And whomstsoever amongst us has ever even pretended to pay taxes on those transfers? The fact is, once money has been flushed out of a business through payroll or the distributions of profits, we can do anything we want with it. Even give it to our friends.