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Many business owners hire their children, their spouse, or other family members to work in their business. Sometimes this works out well. Other times it causes problems. Let’s look at the pros and cons of putting family members on your payroll.

Hiring your children

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

Follow certain steps to make sure the wages are fully deductible. The child must be doing a real job that helps the business, and the wages must 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.

Hiring your spouse or other relatives

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

That same familiarity can bring disadvantages, however.

Few families are without some internal or intergenerational conflict, and that 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.

There could be tax benefits

In addition, depending on how your business is organized and the age of your child, 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.

Be cautious moving forward

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 so 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 call.