Are Large Payments to a Co-Worker Subject to Gift Tax? Or is the Co-Worker Considered an Employee?

[lcarter0826]

A friend of mine is in sales, and nearly all of her compensation is commission based.  Her employer (a large corporation) hired an assistant sales rep that helps her out tremendously. My friend thinks her assistant deserves part of her commission. In an effort to keep her assistant happy, she made significant payments to her assistant out of her own pocket.  This is in addition to what the assistant gets paid from the corporation.

Said differently, let's assume my friend is paying half her commission to a colleague.  Payments made by her to her assistant are made monthly via check, and are after tax (i.e. corporation paying my friend has withheld taxes, and she is just paying her assistant after the fact).

If my friend made $25,000 of payments to her assistant in 2022, is that subject to gift tax? Or somehow is her assistant considered an employee of hers and also the corporation (i.e. assistant is employed by two entities)? As it relates to this specific issue, what does my friend need to do to minimize taxes and related filings?

Much appreciation in advance! Love the turbotax community

[Bsch4477]

The assistant is not her employee so your friend gifted her that money which should be reported on form 709 which should be mailed separately from her tax return. Due to the large estate tax exemption your friend will pay no gift tax. 

[xmasbaby0 · Accepted solution]

GIFTS

Money that you receive as a gift is not taxable income to you, and you do not need to report it on your income tax return.  Money that you gave as a gift to someone else is not deductible for your taxes.

Turbo Tax does not support the gift tax form 709, but here is a link:

https://www.irs.gov/pub/irs-pdf/f709.pdf

https://turbotax.intuit.com/tax-tips/estates/the-gift-tax-made-simple/L5tGWVC8N

As an aside......your friend is giving away money with no way to deduct anything from the gift, and the assistant is getting a lot of tax-free money.  Perhaps it is time for your friend and/or the corporation to consider a better plan to compensate each of them.   

[lcarter0826]

Great answers from both of you - appreciate the responses! Will let her know to file the form 709. Thank you!

[Mike9241]

the payments have to be looked at to see if they meet the IRS definition of a gift.

gift - the transfer of property by one individual to another while receiving nothing, or less than full value, in

return. 

https://www.irs.gov/businesses/small-businesses-self-employed/gift-tax 

if it doesn't meet this test, it's possible the IRS could regard the assistant as an independent contractor or possibly even an employer/employee relationship.  

[Hal_Al]

I agree with @Mike9241 , it's not clear cut that this is a gift. 

It's either a gift or it's income to the assistant.  If it's a gift, your friend has to file a gift tax return.  If it's income, the assistant has to report it as such on her tax return.  Then comes the question of how the assistant reports it.  

Either way, your friend is not allowed a tax deduction.  Since 2018, W-2 employees are not allowed deductions for job expenses. 

"No good deed goes unpunished".