Click Here to Schedule Your Free Consultation

This week on Lawyer Says, our team responds to a fretful Marylander running an Etsy shop with their mother to fund their child’s education. Are they accidentally committing tax fraud?

The Question: Are we accidentally committing tax fraud through Etsy?

My mom and I have a very small business selling a type of semi-difficult-to-find items, mostly through Etsy but sometimes to private sellers. Our LLC/tax ID is set up in her name, and all income is declared on her taxes so that I can keep from having to file. 100% of the income goes into a 529 for my son’s college.

Issue — although my mom does do the accounting/yearly taxes, 99% of the work required to operate the business is done by me. My brother has started “joking” that he’s going to rat us out, because what we’re doing is tax fraud.

He says that since I’m actually running the business, it legally needs to be in my name, and that this situation is especially fraudulent because since our mom is over 65, she is taxed at a lower rate than I would be, so we’re cheating the government, especially since the whole point of structuring it this way is so that I don’t have to report income.

My feeling is that since I do not handle or benefit from the income, this is fine. My mom deposits the income directly into my son’s 529, and the money is not co-mingled with either of our household finances. I have access to a small pot of money for operational costs, and I’m not sure if that changes anything.

Is how we have this set up not allowed? I really don’t want to have to shut down.

The Answer: You should be fine, but double-check with an accountant and a corporate attorney.

Frankly, it sounds like your brother doesn’t know what he’s talking about.

While senior citizens in Maryland do enjoy certain benefits with their state income taxes — including certain types of income reductions and special tax exemptions — the state tax rate is based on reported income level, not the filer’s age.

Legally, it shouldn’t matter whether you or your senior citizen mother account for the income — as long as that income is accounted for. Assuming everything else is equal, there doesn’t seem to be any obvious tax fraud occurring.

Now, legally, it may be in your best interest to talk to a corporate attorney and a business accountant about how your Etsy business is actually structured. There doesn’t seem to be clarity as to what percentage of the business each person “owns,” which could cause some issues.

(On a side note, we’re guessing that your brother would have 0% ownership of the company…?)

Regardless, getting a legal contract or other official document drafted to straighten out your business’ structure would probably help clarify your overall income situation.

Even then, there’s really no legal requirement that a business owner take any income from their business for themselves.

So, breathe easy — and tell your brother to butt out!

Get Answers to Your Burning Legal Questions!

You can submit your own question to #LegalSays below, or just skip the wait and go straight to scheduling your own (free) first consultation with a [nap_names id=”FIRM-NAME-1″] attorney at your convenience.

Our general disclaimer: We’re lawyers, but not necessarily your lawyer, and do not represent the individual who asked this question. We’re providing this information for general educational purposes based on the publicly available information provided by the anonymous Internet user. Any number of details may change how this individual’s attorney may pursue this legal situation, differently from how we suppose above. If you have a similar question, then you should consult with a lawyer about your specific situation to get a “real” response!