Courts have not been kind to judgment debtors who attempted to exempt as head of household wages the compensation they received from a business they own and control. Florida state and federal courts have ruled that a business owner’s compensation is typically business profit rather than wages even through the business owner pays employment tax on the money and uses the money to support other family members.
Nevertheless, a recent Florida bankruptcy case (2018 WL 3854018) held contrary to previous rulings that did exempt the business owner’s compensation as head of household wages. In this instance, the judgment debtor was an equal partner with an unrelated person. The debtor’s salary was negotiated with the unrelated partner, and the salary was separate from profit allocated equally between the partners. The debtor’s salary was found to be fair in amount and consistent in payments. The court distinguished this arrangement from situations where the debtor’s partner was a family member or where the debtor indirectly controlled his own compensation.
A small business may generate exempt salary to a business owner if the business and compensation is properly arranged and documented in advance. For example, proper documentation may includes emplacement agreements and a well-drafted LLC operating agreement.