This can be illustrated in many ways. But for the sake of a concrete example, let's assume a sample scenario: We have an employer (Mr-A) and his employee (Mr-B) also happens to be his "good friend". The annual wage is $x which naturally is subject to income taxes. Here's the catch though: $x is a low number by "normal standards" (e.g. ~$5 annual wage, or ~$50 or ~$500 or ~$5000.. it doesn't really matter).

However, Mr-A gifts his friend items and cash amounting to below $14k, or let's just put it at below $10k annually. This can be ~$9000 or below but it doesn't really matter. Mr-A does not expect to get anything in return from Mr-B, so it is a "true gift". (Though perhaps if Mr-B decides to stop working, Mr-A may also arbitrarily decide not to continue his gifts to Mr-B.)

On top of that, Mr-A's spouse also gifts Mr-B items and cash amounting to below $10k annually, and each of Mr-A's other friends and relatives also gifts Mr-B items and cash amounting to below $10k annually.

In other words, in total Mr-B could've received "true gifts" amounting to over $20k, $50k, or even over $100k a year in cash and items.

Is such a thing legal?

Are there any ways to work around it? (akin to the irish tax loophole used by Apple and Linkedin for corporate taxes which used to work)

  • 10
    No idea about the US, but in the UK any scheme of this sort is classed as a tax avoidance scheme and you have to declare what you are doing to the Inland Revenue. In this specific example they would almost certainly decide that the gifts are really salary and should be taxed as such.
    – Vicky
    May 14, 2013 at 15:57
  • 15
    Unfortunately, this is one of those you need to ask a lawyer questions, so IANAL and this is a non-legal opinion yada, yada, but in order to be considered a gift it must given with no expectation of getting anything in return. Thus, your claim of getting only a $5 salary will certainly be considered tax avoidance in any country because I'm certain that the $130K has the expectation of your working for the family. It'll be hard to prove that you are donating your time while still getting money. The IRS will look at what a person doing your job should earn and see that $60 is not reasonable.
    – Dunk
    May 14, 2013 at 16:20
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    @Pace:I would say that what you describe is ok as long as you (or immediate family member) doesn't work for "your friend". Otherwise, it is obvious by a "preponderance of the evidence" that your scheme is a means of tax fraud. You know the IRS isn't going to like your scheme and if it goes to court, do you really believe that you will be able to convince a jury that the $130K is just a gift and you would be working for "your friend" for $60 a year, even without the "gift".
    – Dunk
    May 14, 2013 at 17:08
  • 5
    You have the best friends ever, I wish I had friends who wanted to give me $130,000 a year no strings attached. Errr, wait... this is blatant tax fraud as best I can tell on both your part as well as the business. So I guess the answer is, "no, you don't have to pay any taxes - but be prepared to face significant fines/jail time when the IRS finds out."
    – enderland
    May 14, 2013 at 17:21
  • 6
    To be clear - The current (2013) US gift limit is $14K/yr. The lifetime limit is currently $5.25M. But as everyone responding has noted, the proposal is tax fraud. The gifts are typically used by family to pass on to the next generation, or used to fund college savings accounts. May 14, 2013 at 19:55

3 Answers 3


Am I right to say that no tax needs to be given for the annual ~$130k USD, since they are considered as annual gift tax exclusion?

Not only that you're wrong, but it also looks like a tax fraud, not just mere avoidance. You'll have hard time proving to any judge or jury that the gifts are "in good faith".

By the way, $5 a month is below minimum wage.

  • 2
    @Pacerier with stock option grants, that are considered salary for the purpose of minimum wage.
    – littleadv
    May 14, 2013 at 17:37
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    @little - There are actually a fair number of exemptions to minimum wage laws. In particular, higher level management, administrative staff, sales staff and seasonal workers.
    – Dunk
    May 14, 2013 at 18:36
  • @Dunk depends on State really, for many small employers Federal minimum wage doesn't apply.
    – littleadv
    May 14, 2013 at 18:48
  • @Pacerier they're not gifts, they're salary. Is salary not taxable?
    – littleadv
    Jun 20, 2013 at 16:37
  • @littleadv, So that's not too much point in the $1 salary after all right?
    – Pacerier
    Jun 21, 2013 at 1:38

This is tax fraud, plain and simple.

I recently wrote an article The Step Transaction Doctrine, in which I explain that a series of events may each be legal, but aggregate to one transaction and the individual steps are ignored.

In this case, it goes beyond that, by accepting $5/mo you are already outside the tax code. As littleadv noted, you can't work for a legitimate business for free and not expect to have some kind of issue. The $14K/yr gift isn't a bona fide gift, but ties to that work.

  • I mean, the point of the question is how to make it not a tax fraud? ...What are some of the technicalities or crucial steps that need to be taken for it to be not a tax fraud?
    – Pacerier
    Jul 9, 2016 at 17:28
  • 1
    Simple, you claim every cent, save for a sub-$25 valued gift at Holiday time. Jul 9, 2016 at 17:40

In almost all cases, gifts from employers are considered taxable compensation, based on the employer-employee nature of the relationship. Furthermore, cash gifts are always considered to be intended as wages, regardless of how you receive the money.

Furthermore, regardless of whether you expect to receive anything in return (such as contractual consideration) or whether the amounts are large enough to be declared as taxable personal gifts, it is likely that the IRS would consider these payments to be "disguised wages", as these payments would fail several tests that the IRS uses to determine whether benefits provided by the employer are non-taxable, including:

  1. Must be occasional or infrequent
  2. Must be of nominal value (usually below $100.00, my company's guidelines are even lower)
  3. Can never be in cash, with the exception of travel & meals to facilitate overtime.

I'd recommend reviewing IRS publication 535 here, as well as publication 15-B here for more on what constitutes taxable wages & benefits.

It seems very unlikely to me that you could make a persuasive legal defense in which you claimed to be working full-time for $60.00 per year and just happened to be receiving large personal gifts of $130,000.00. In my opinion it seems much more likely that these payments would be found to be taxable wages for services rendered.

  • 3
    And if it comes to the IRS audit, I'm pretty sure its going to be treated as a criminal investigation against both the employer and the employee (not only income taxes are at stake here, but also state taxes, FUTA, FICA and disability insurance, etc).
    – littleadv
    May 14, 2013 at 17:50
  • OASDI, Medicare tax withholdings as well...
    – JAGAnalyst
    May 14, 2013 at 19:39
  • 1
    +1 - and in this case, the employer would not be able to deduct the payments as a business expense, which would be costly for him. May 14, 2013 at 20:45
  • 3
    @JoeTaxpayer yes given the business expense implications it seems umlikely that an employer in a legitimate business would offer to compensate anyone in this way unless the main business itself was also evading taxes
    – JAGAnalyst
    May 15, 2013 at 17:56

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