It's Christmas Eve and this year, as always, at my house, there's a lot of anticipation. And by anticipation, I mean that the kids don't want to go to sleep (I have a totally different idea). We're tracking Santa's progress via NORAD (North American Aerospace Defense Command, a United States and Canada bi-national organization charged with the missions of aerospace warning, aerospace control, and maritime warning for North America). If you're curious, you can track Santa's journey, too, via email to noradtrackssanta@outlook.com or phone by calling 1-877-HI-NORAD or 1-877-446-6723. They're also on twitter @NoradSanta.
As of this writing, Santa was last spotted at La Paz, Bolivia, and was headed for Caracas, Venezuela. He still has a lot of ground to cover before hitting Pennsylvania.
As a result, we've had quite a few discussions in my household about how Santa manages, in one night, to get all of his work done. Clearly, he has help. And that has financial and tax consequences, right? So we had a little chat about Santa's money and his tax bill. And here's what we – a tax attorney and three kids – decided:
First, residency. Let's go ahead and get this out of the way right now. My kids got letters from Santa again this year and they were postmarked North Pole, Alaska. So Santa clearly maintains his primary residence – and place of business – in the U.S. though we can't be completely certain about his citizenship. There was zero additional discussion on this point.
Next, revenue. We're not sure how Santa makes his money. My nine year has decided that Santa doesn't need money since the elves make all of the toys (though the seven year old vehemently disagrees with this because he has seen toys also in the stores). As to how he pays for those associated expenses? He doesn't have another job – my kids are very clear on this point – so we're going on the theory that Santa is independently wealthy or has some additional forms of revenue (more on that later) because he must spend a lot.
Based on the numbers from 2012, there are 526,000,000 Christian kids under the age of 14 in the world who celebrate Christmas on December 25th. That works out to a delivery rate of almost 22 million kids an hour, every hour, on Christmas Eve (it's worth noting that NORAD doesn't make the distinction between Christian and non-Christian kids on Santa's delivery route so they estimate many, many more deliveries).
In America (which, granted, is a bit more flush and commercial than many other countries), gifts per child are said to average $271 at Christmas. Assuming 526,000,000 children, that works out to $142,546,000,000 in fair market value of gifts.
Since Santa doesn't sell the toys – he gifts them – his asset value dips considerably. He would not be subject to gift tax, however, since federal estate and gift tax laws allow taxpayers to gift $14,000 per person per year for 2013. That means that Santa can give away millions and millions of dollars worth of toys without federal gift tax consequences – so long as they're to different kids. If Santa gives any child more than $14,000 in gifts (using the fair market value, since that's what the IRS uses, elf-made or no), he would be subject to the federal gift tax and would need to file a form 709, federal gift tax return.
In exchange for making the toys, the elves are not paid in cash. My kids are convinced that Santa doesn't pay the elves a wage for their work. Instead, he provides them with room and board and other perks. Even if he doesn't pay cash – he pays expenses – that's still considered compensation and it's taxable to the elves. Fortunately, it's also deductible to Santa.
Santa has, according to the nine year old, 500 elves. It's a little more expensive to live in Alaska than the national average – about 34% more. The state median income for one person in Alaska is $54,272, according to the Department of Justice. I know that seems a bit high for an elf – but the work they do is quite important, right? So Santa clearly wouldn't skimp. That works out to $27,136,000 in compensation for the 500 elves.
Compensation is taxed to the elves as income – but Santa has taxes to pay on their behalf. Payroll taxes – at the employer contribution rate of 7.65% – for the elves work out to $2,075,904 (remember that, for 2012, the elves get a 2% break on their share of payroll taxes).
Santa doesn't pay income taxes on compensation paid to the elves but he does have to manage their withholding according to any forms W-4 provided to him. Fortunately for Santa, there is no withholding requirement for state taxes in Alaska. There is, however, an employer contribution to unemployment insurance (SUI). I can't imagine that there are a lot of unemployed elves – so I'm guessing the rate is fairly low – but we'll calculate those costs using the average rate of 4.11%. Applying that rate to the wage base for all of the elves results in $735,690 of employer contributions for SUI.
For 2013, Santa will have to report health care insurance costs paid by him for the elves on their form W-2. Fortunately for both Santa and the elves, there is no tax payable on those benefits. Other perks, however, may be taxable if they are not de minimis (meaning they are more than insignificant). For example, cell phones for the elves would be okay so long as there's a business purpose – but tickets to reindeer games (the Super Bowl of the North Pole)? Probably not de minimis.
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