On Thursday the Trump Organization and its Chief Financial Officer Allen Weisselberg plead not guilty to a 15 count indictment. Essentially the charges say the Trump Organization and Weissellberg orchestrated a scheme to give more than $1.7 million to Weisselberg tax-free over a more than 10 year period. They plead not guilty because they did nothing wrong.
When an employee negotiates a compensation package, both the salary and the fringe benefits are determined. After the salary, the company will pay for certain fringe benefits like health insurance, life insurance and other perks.
It is beneficial to the employee, and it does not harm the company, to have the company directly pay for benefits like health insurance premiums for the employee. The reason is simple: it saves the employee some income tax.
For instance, let’s say the company agrees to provide health insurance for every employee. Let’s say it costs $16,000 per year for the plan. If the company simply said they would add the $16,000 to the employee’s compensation, then the employee would have to pay federal and state income tax on that $16,000.
As taxable income, if the employee paid a combined 25% tax rate, then $4,000 in tax would be due, leaving the employee just $12,000 to pay for the $16,000 policy. However, if the company pays the $16,000 directly to the health insurance company for the employee, then the full amount would be paid without creating a taxable event.
That is the reason that companies pay for the benefits directly. It eliminates a tax liability for the employee, while the employee receives the full benefit amount.
Most likely every worker has a compensation package that includes salary and benefits. What the Trump Organization and Weisselberg did was exactly what every employer does for virtually every employee.
As noted above, the indictment said that Weisselberg received $1.7 million in benefits over about a ten-year period, which amounts to about $170,000 per year. How could benefits possible be so high?
Suppose a multi-billion corporation, like the Trump Organization, wanted to hire a chief financial officer (CFO) whose primary responsibility would be to handle the cash flow. The CFO’s responsibility would be to make sure the net profit was hundreds of millions, or perhaps billions, of dollars.
A CFO of that caliber would easily have a seven-figure salary. Suppose further that the candidate selected for the job agreed with the offered salary but simply said they do not want to live in Manhattan mostly because the living expenses are so high. Also, they may not want to send their children to public schools. And then there is the high cost of having a car in the city.
In order to have the CFO accept the offer, the company says they will increase the benefits package. The company will pay the housing expense for the employee. The company will pay the tuition expense to send their children to private schools. The company will also provide the employee with a new car and a driver. These costs, including health and life insurance, may total $170,000 per year in Manhattan. Over a ten-year period that’s $1.7 million.
This is not a scheme to avoid taxes. This is merely the way compensation packages are structured. This is perfectly legal and allowed by the IRS.
The University where I teach hired a new president a few years ago. The University negotiated a salary that was acceptable to him. In addition to the salary, the University owns a large luxurious home near the college. This is known as the president’s mansion. The president lives in the house rent-free.
The university president also receives a fully paid-for, Cadillac health care plan as a benefit that is paid entirely by the University. The president also gets a luxurious car that comes with a driver. At no cost to him. And his children can attend the university tuition-free.
Should the University, its chief financial officer and the University President be indicted for tax cheating? Of course not.
Even if some expenses were taken as benefits and really should be taken as income, what happens nearly every time, is that the back taxes are paid, interest on the back taxes is paid and often a financial penalty. Unless there is a reason to “go after” the individual, there are almost never criminal charges.
Is the New York attorney general looking to simply “go after” Trump? It sure looks like it.