Is Firing Yourself a Brilliant Tax Strategy?

Truly no one likes to lay off or fire employees. If an employee has been working for you for a long time it is even harder. If they are new and just not working out it’s not so bad. You might even be doing them a favor if they are young. Not everyone is meant for sales or marketing or tax planning or well, you get the point.

Over the last couple of years the scenario of down sizing has been faced by too many small business owners because of the weak economy. They have had to let go long-time, trusted and productive employees. So it is not hard to see why it was easy for a small business owner in Florida to gain a lot of press for laying herself off from her business when she had to let go several employees after having lost a large client.

I first saw this story on Fox News (much to the dismay of Howard Dean, I really do appreciate well fabricated news) over the weekend and it was re-run last night on the local Fox station here in St. Louis. My family was sitting down to dinner and after having the ritualistic argument with my 7 year old daughter over turning off the kid shows and switching on Channel 2 this story popped up once again.

My wife, seeing this story for the first time, was astonished that this altruisitic small business owner would give up her income to save her employee’s jobs. I had to respond that it was really a brilliant tax move on top of a great way to gain publicity for your business.

This comment of course brought one of those glances that said I had to be pulling her leg. Since my wife is in public relations I knew the look was not about the PR apsects of the owner disclosing her own firing.

So, I simply said that it was a brilliant way to remove all of your income from your business as passive income and completely avoid payroll taxes on the money a business owner receives from their business. My wife promptly called me a “tax geek” to which I agreed.

Now, I am not by any means recommending to any small business owner that they should fire themselves from their business. I have never recommended this strategy to a tax planning client and would like to say for the record that I cannot say this strategy has passed or will pass IRS scrutiny. It is certainly a creative approach to avoiding payroll taxes, and if it does pass IRS scrutiny, you can be sure to hear about it here.