Hiring a Family Member in Your Business;
Some Benefits and Drawbacks
A majority of American small businesses are family-owned and many business owners welcome the prospect of keeping their businesses operating within the family unit. While hiring family members can present some potential drawbacks, the practice can also yield strong benefits.
However, you should consider the following factors before choosing to hire a relative.
1. All relatives are not made equal
Employee relatives do not all share equal legal standing. The rules shift depending on the nature of owners’ familial relationship to their employee and the employee’s age.
Spouses are subject to income tax withholding and Social Security and Medicare taxes; they are not subject to Federal Unemployment Tax Act (FUTA) taxes. In this regard, the proprietor and his or her spouse are considered a single unit.
The status of children employed by a parent varies based on their age. Children under the age of 18 are not subject to Social Security, Medicare, or FUTA taxes if the parents’ business is a sole proprietorship or a partnership in which each partner is a parent of the child. Children between the ages of 18 and 20 are treated like spouses — they are a part of the familial unit and are exempt from FUTA taxes only. Once a child reaches the age of 21, he or she is treated no differently than any other employee. At this point, children are subject to all the same withholding taxes as any other employee.
If a parent is employed by his or her child, the parent is subject to income tax withholding and Social Security and Medicare taxes on his or her wages but is not subject to FUTA taxes on them.
2. The tax implications can work in your favor
Hiring their minor children can yield definite tax benefits for parents. For example, a child who earns less than the standard deduction does not owe any federal income taxes. In 2022, that amounts to $12,950 per child sheltered from taxes annually. The parent will still be able to claim the child as a dependent, too.
Also, hiring a minor child jump-starts the saving process. Money earned working from your parents is earned income. As such, those funds can be contributed to an individual retirement account. The compounding effect of saving money at such a young age can be significant, and the best choice may be a Roth IRA.
3. Make sure they are up for the task
If business owners hire their kids they should ensure that the work is legitimate and age-appropriate. Hiring a relative is not an excuse to cut them a paycheck and not expect them to show up. The work needs to be real.
Business owners need to consider their children’s age when assigning them work. There are labor law exceptions for family members, but you can’t have a small child operate heavy machinery. Examples of age-appropriate work include clothing modeling for babies and toddlers and sweeping and photocopying for grade-school children. The pay must be appropriate and reasonable, too. Just because your employee is related to you, that doesn’t provide a carte blanche to pay whatever you would like. The pay must correspond to the work.
4. Beware of the pitfalls
While hiring a relative can prove rewarding, it also has the potential to undermine the morale of the rest of the staff. Accordingly, business owners should fight the temptation to give their relatives special treatment. For example, don’t pay your child twice as much as everyone else. Word will get out, and it will breed resentment.
Business owners should encourage their children to gain work experience at another organization before bringing them on as experienced hire. That way they already have developed a level of mastery and can largely avoid imposter syndrome.
Ultimately, familial relationships take priority over money. Unfortunately, money can drive people apart, and business disagreements poison close relationships. Business owners should make sure that they understand that they risk placing stress on their relationships if difficulties arise in their business arrangement.
In summary, for the responsible business proprietor, hiring relatives is a viable option. Business owners should consider all the factors, financial and otherwise, before they decide to hire family members to work in their businesses. Despite some potential drawbacks, getting family involved can prove a personally rewarding and financially enriching decision.
The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.