did I help my mother embezzle money?

[ResidentialBusiness]

This post was written by Alison Green and published on Ask a Manager.

A reader writes:

This is not a current issue, but it’s something that has been eating at me for a long time. I’m trying to figure out if I unwittingly helped someone embezzle money. I believe the statute of limitations has passed for this (potential) crime in the state that it took place in. It has been 15+ years now.

My mother has always been a little shady with business her practices. I do not believe she has any qualms about “bending” the law. She is also very charismatic and I suspect would be quite an effective cult leader (i.e., good at talking people into things, frequently nefarious). I’m only mentioning this because it seems like important context to have.

She was the CEO and one of the owners of a small business (35-50 employees) that no longer exists. She had two other business partners who helped her start the company. This was a corporation so none of their personal finances should have been directly tied to the company.

She put me on the payroll at 13. I helped out at the office probably 3-5 times total between the ages of 13 and 16, so I was not a regular employee. I did things like cleaning and filing. I don’t recall seeing paychecks for anything during that time, though it was quite a long time ago and my memories of this are a little fuzzy. I do remember one incident pretty clearly though. When I was 18, I was given a paycheck and asked to sign it over to her. I had not done any work for this company for quite some time. And I certainly wouldn’t have made the amount the check was written for. I believe it was just under the amount that would have been reported to the government on taxes (I think $10,000 is the threshold). I did see the check and this was definitely a paycheck from the business. She said the money was going to be used for a personal expense. She specifically told me that it was all legal, so I did what she asked.

So, is any of this actually legal? Additionally, could she have been doing this while I was underage? Are there any details that would change the legality of the situation? I’m wondering if she found some sort of loophole that may not have been ethical but still legal.

Even though I was told it was legal, it felt off to me and I made excuses not to do it again. She was Very Not Happy when I wouldn’t do it again, which adds to my suspicion.

The situation is over now, and I am no longer in contact with her. I doubt anything would come back to bite me at this point, but I still wonder if I could have gotten into legal trouble.

It almost definitely wasn’t legal.

If you own a private business with no fiduciary responsibility to anyone else, you can pay someone for any “job” you want, including one that does no work at all.

However, if you’re doing it just so they can sign over their paychecks to you, now you’re committing tax fraud. This can be nuanced and I’m neither lawyer nor tax expert, but in general:

Since the income was reported as a payment to you and you weren’t earning enough to pay taxes yourself, that money wasn’t taxed … and even if you were earning enough to need to file a tax return, it’s likely that your mom would have had been in a higher tax bracket than you, since you were a teenager. Either way, that’s tax fraud. Interestingly, there’s a rule that taxes a child’s unearned income at the parent’s tax rate in order to prevent exactly this. But if your mom was classifying it as “earned” when it wasn’t earned through work, we’re back at fraud.

I’m also curious whether she paid the business’ portion of the payroll taxes on the wages you received. (If she was paying you as a contractor, not an employee, then this wouldn’t be required. It also isn’t required when paying one’s own children when they’re under 18, but you were 18 for at least part of it.)

Additionally, by fraudulently “paying” you, your mom was lowering the business’s taxable income — another problem.

It’s possible there were other legal problems too, like if your “cost” was expensed to another entity. And if your mom’s business partners didn’t know what she was doing, she may have been violating laws about her fiduciary duties.

If the business were a sole proprietorship, that would change some of this, but it wasn’t.

However, your mom was the one committing fraud, not you. It’s extremely unlikely that any of this could ever have come back to bite you — but if your mom had been audited, it definitely could have bitten her.

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