What you need to know about hiring family members

hiring family members in small businessMany business owners hire their child(ren), spouse, or other family members to work in their business. Sometimes this works out well. Other times, it causes problems. Here are some of the key pros and cons of hiring family members.

Hiring your children

Hiring your kids for a part-time job usually has more tax advantages and fewer drawbacks than hiring others. The financial advantage is that the business gets a tax deduction for the wages you’re paying your child for useful work. Your child will probably pay little or no income tax, and the after-tax wages stay in the family.

To ensure the wages are fully deductible, the child must be doing a real job that helps the business. The wages must also be reasonable for the work performed. Keep detailed records of hours worked and pay salary regularly, preferably on the same schedule as other employees. In other words, treat your child just like any regular employee.

In addition, depending on how your business is organized and your child’s age, you may be able to avoid paying Social Security, Medicare, and unemployment on their wages. To qualify, you must be a sole proprietor or a husband-wife-eligible partnership, and your child must be under the age of 18.

Hiring your spouse or other relatives

An advantage to hiring your spouse or other relatives is that you have an employee whom you know well and who may be more motivated or more flexible than a non-family member. In many family-owned businesses, it’s a powerful way to train the next generation to take over the company’s leadership.

That same familiarity can bring disadvantages, however.

Few families are without internal or intergenerational conflict, which can be disastrous if it spills over into the workplace. You must also consider the effect on other employees. Any sign of favoritism or unequal treatment can cause resentment and ruin the motivation of other employees.

Use caution when hiring family members

There are plenty of businesses where hiring family members has worked out just fine, but other businesses where it didn’t work out. So, think long and hard before you bring family members into the business. Talk to them and to your key employees beforehand. This way, everyone understands and is comfortable with their roles in the company.

As always, should you have any questions or concerns regarding your tax situation, please feel free to contact RRBB Advisors.


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