Are We Committing Tax Fraud With My Etsy Shop? Lawyer Says...

This week, our lawyers answer 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?

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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, your brother doesn't sound like he knows what he's talking about.

While there are benefits that senior citizens in Maryland enjoy when they file their state income taxes -- including certain types of income reductions and special tax exceptions for specific senior citizen benefits -- the state tax rate is based on reported income level, not the filer's age.

Legally, it shouldn't matter whether you or your above-65-year-old mother account for the income -- just so long as it's accounted for. Assuming everything else is equal, there doesn't seem to be any obvious tax fraud occurring.

Now, legally, you might want 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 each person "owns" of the business.

(We're guessing your brother would have 0% ownership of the company...?)

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

And, even then, there's not really a legal requirement that a business owner take any income from their business.

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

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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!