Hiring family members like your spouse or child can hold a lot of advantages, like familiarity, trust, and loyalty. But there are also some challenges to be aware of like special rules that apply when adding relatives to your payroll. Specifically, employment tax withholding and reporting requirements for family employees may vary from those that apply to other workers.
While some companies may have policies against it, there is no law prohibiting nepotism in private business so yes, you can legally hire family members. However, it’s important to know that when it comes to hiring children, you’ll need to follow federal and state child labor laws that may restrict the hours a child can work, times of day and type or work they can do, including equipment they can operate. The Department of Labor has a listing of all of these laws so you can quickly see any restrictions you need to be aware of.
And just be sure that your family members are qualified for the job and doing bona fide work. For example, give them a job title and description and keep track of their tasks. You’ll also want to make sure you treat them like any other employee.
When hiring family members, are they considered employees?
When it comes to adult family members, you can generally treat them the same as your other employees. That means when they come on board, you’ll need to:
- Have them complete new hire paperwork such as a Form I-9 and Form W-4
- Follow the Fair Labor Standards Act when it comes to paying family members, including following the minimum wage and overtime provisions
- Withhold income and Federal Insurance Contributions Act (FICA) taxes and include family member wages when calculating your business’ FICA taxes; however, if you’re hiring your spouse or parent, you don’t need to pay federal unemployment tax (FUTA)
- Provide the same benefits to family members that you do to other workers such as health insurance
There are some differences when it comes to hiring family members that are children. For example, you don’t need to pay FUTA on the wages of your children under age 21 or FICA tax on their wages if they are under 18. Keep in mind the tax benefits of hiring your child only apply if you run a sole proprietorship or partnership, which we’ll discuss in a bit.
How much can I pay family members?
There’s no set limit on what you can pay family members. However, there are some considerations that may impact what you choose to pay them. For example, if you employ non-family workers, you’ll want to be aware of the effect of favoritism on your company culture. As a result, you should aim to pay your family members the same wage as you would any other worker with the same experience in the same position based on industry guidelines for each job description.
Another factor to take into account when setting the salary for a family employee is the effect on your taxes. Since paying a salary to family members decreases your net business income, you may choose to pay your family employee a wage that will lower your income and tax bracket for more favorable tax treatment. However, if you’re paying your spouse, keep in mind that if you plan to file a joint tax return, that income will need to be reported on your personal taxes.
How do I pay family employees?
When you’re hiring family members, you can pay them using any method you would regular employees. That could be by cash, paper check, direct deposit, or other options like paycards or pay apps. Just remember that if you pay your family in cash, you’ll need to make sure you take withholdings from the pay or the IRS and state tax authorities could take action if they discover during an audit that you’ve been paying them under the table.
What are the tax implications of hiring family members?
As we previously discussed, employing family members can hold certain tax advantages around FICA and FUTA taxes. However, these payroll tax exemptions are only allowed if your business is a sole proprietorship or a partnership owned by you and your spouse. A corporation, on the other hand, can’t take advantage of the tax breaks. That means that if you run a corporation and hire your child, for example, you must withhold income tax and FICA.
One of the advantages of running your own business is hiring family members. But to maximize the benefits to you and your business, you’ll want to make sure you follow all applicable state and federal laws when it comes to payroll and payroll taxes.
Karyn H. Rhodes is vice president HR Solutions at Complete Payroll Solutions. She specializes in all areas of human resources, including strategic planning, employee and labor relations, recruiting, compliance, training and development, compensation and benefits, policies and procedures, organizational development, executive coaching, workforce planning, and affirmative action plans. More info at completepayrollsolutions.com