Running a small business often means wearing many hats — managing operations, handling finances, and ensuring everything runs smoothly. For many business owners, family employment seems like a natural solution. After all, who better to trust with your business than the people closest to you?
Family employees, like spouses, children, siblings, and parents, offer dedication and flexibility. They also share a vision that is hard to find elsewhere. In fact, over 80% of businesses worldwide are family-owned.
Many small businesses depend on family members. This helps save on hiring costs, builds long-term stability and creates a trusted work environment. While bringing family members into your business has clear advantages, it also comes with unique legal and tax considerations.
The IRS has specific guidelines for family employment. Failure to comply can result in penalties, audits, or even accusations of nepotism. However, when done correctly, employing relatives can have major benefits. It can reduce payroll tax obligations, increase business deductions, and contribute to the long-term success of your company.
In this guide, we’ll explore:
- Legal and tax implications of hiring family members
- Potential pros and cons
- How to structure employment fairly and professionally
- Best practices for managing family hires without conflicts
Understand these key factors, legally and strategically hire family members while protecting both your business and personal relationships.
Is hiring family members legal?
Yes, hiring family members is completely legal and widely practiced among small businesses. The Internal Revenue Service (IRS) recognizes family employment and provides specific guidelines regarding payroll taxes and benefits. However, small business owners must ensure they comply with:
- Federal and state labor laws, including minimum wage requirements.
- Child labor laws, which regulate the type of work minors can perform.
- Payroll tax laws, to ensure proper withholding and reporting of wages.
Pro tip: Employers hiring family members should maintain clear job descriptions. Maintain proper payroll records and formal employment agreements to avoid legal scrutiny.
Is hiring family members nepotism?
Nepotism refers to favoring family members for jobs without considering their qualifications. While hiring relatives isn’t inherently unfair, it can create conflicts if not handled correctly.
How to avoid nepotism concerns:
- Hire based on qualifications: Ensure family members meet the same job requirements as any other candidate.
- Maintain transparency: Clearly communicate hiring decisions to the team to prevent resentment.
- Hold family members accountable: Treat them like any other employee, with clear job expectations and performance reviews.
Pro tip: Family employment should be merit-based to ensure business success and maintain employee morale.
Is there a family tax credit?
There is no direct family tax credit for hiring relatives. However, employing family members can provide tax savings in the following ways:
1. Hiring your children
- Wages paid to children under 18 do not have to pay Social Security and Medicare taxes. This applies if the business is a sole proprietorship or a partnership where both partners are parents.
- Payments to children reduce taxable business income, potentially lowering self-employment tax obligations.
2. Hiring your spouse
- If your spouse works for your business, their wages are taxed as income. However, they are not taxed for unemployment (FUTA) in sole proprietorships.
- You may be able to contribute to a retirement plan on their behalf, maximizing tax deductions.
3. Hiring other family members
- Parents working for a child’s business are exempt from FUTA tax. However, still subject to Social Security and Medicare taxes.
- Payments to siblings or extended family members are treated like regular wages but can still provide business tax deductions.
Pro tip: To get the most tax benefits, make sure wages are fair for the work done. Also, ensure that the right payroll taxes are taken out.
Tax and legal implications for hiring family members
Hiring relatives impacts tax reporting, payroll responsibilities, and employee benefits.
Payroll tax responsibilities
- Children under 18: No Social Security or Medicare tax required (for sole proprietors and some partnerships).
- Spouses: Subject to income tax withholding, but exempt from unemployment tax in sole proprietorships.
- Parents: Exempt from FUTA tax, but still subject to other payroll taxes.
Legal compliance
- Follow minimum wage laws: Even family members must be paid at least the federal or state minimum wage.
- Classify correctly: Family members should be W-2 employees, not independent contractors, unless they genuinely work on a contract basis.
- Maintain employment records: Keep detailed payroll documentation, including time tracking and tax withholdings.
Pro tip: Using Invoice Fly’s time tracking software ensures proper record-keeping for tax compliance.
Advantages and disadvantages of hiring family members
Pros
- Trust and reliability: Family members may be more committed and loyal to the business.
- Tax advantages: Hiring children, spouses, or parents can reduce payroll tax obligations and provide business deductions.
- Flexible work arrangements: Family members may offer more scheduling flexibility than other employees.
- Long-term investment: Training family members can create future leadership opportunities.
Cons
- Workplace conflicts: Personal and professional boundaries can become blurred.
- Perceived favoritism: Other employees may feel overlooked or disadvantaged.
- Potential tax scrutiny: Improper payroll practices may lead to IRS audits or penalties.
- Lack of external experience: Relying solely on family members may limit fresh perspectives and innovation.
Pro tip: Set clear policies on hiring, performance evaluations, and conflict resolution to maintain a fair workplace culture.
How to hire family members legally and effectively
1. Do your legal research
- Review IRS payroll tax rules for family members.
- Check state employment laws to avoid compliance issues.
2. Make sure they’re qualified
- Hire family members based on skills and experience, not just because of the relationship.
- If training is needed, invest in their development to ensure job competence.
3. Don’t treat them differently
- Setting expectations, performance reviews, and salary structures to family employees.
- Avoid favoritism by ensuring equal opportunities for promotions and raises.
4. Communicate expectations beforehand
- Discuss work responsibilities, compensation, and long-term career goals before hiring.
- Set boundaries to separate work and family relationships.
5. Complete the hiring process like any other employee
- Provide formal job offers and contracts outlining duties and pay.
- Set up proper payroll tax withholding and employee benefits
Pro tip: Use Invoice Fly’s client portal to keep track of all documents and steps when hiring family members.
How does a company benefit from hiring family members?
Employing relatives can strengthen business operations and provide financial advantages, such as:
- Increased trust: Family members are often more invested in the company’s success.
- Better tax planning: Hiring children, spouses, or parents can reduce payroll tax burdens and increase deductible expenses.
- Stronger business continuity: Training younger family members can help sustain the business for future generations.
Pro tip: Businesses that carefully integrate family employment while maintaining professionalism tend to experience long-term growth and stability.
Making Family Employment Work for Your Business
Hiring a family member can be a good idea, but only if it’s done right. Bringing relatives into your business can provide tax benefits, build trust, and create long-term stability. However, it is important to set clear expectations. This helps maintain professionalism and avoid conflicts of interest.
A hiring manager should treat family members like any other team member. Ensure they meet job qualifications, follow company policies, and contribute to the business’s success. Fair pay, clear responsibilities, and regular performance reviews help prevent workplace legal issues while keeping things professional.
Understanding the legal and tax requirements of family employment is just as important. To follow IRS guidelines, classify employees correctly and keep accurate payroll records. This can help you get tax benefits and stay compliant.
By managing family employment wisely, small business owners can balance trust and professionalism. This helps them build strong teams that lead to long-term success.
For seamless expense tracking, invoicing, and tax management, consider using Invoice Fly’s business tools to keep everything organized.
Start managing your family hires the right way today.
