Hiring Family Members in Your Business

There are no laws against nepotism (hiring family members) in private business, but having family members working in your business does present some unique tax and employment situations. Here's what to watch out for when hiring family,

Hiring Family Members

In some cases, children must be treated differently for tax and work purposes, but for adults, everything you do for other employees, and every employment tax you pay for other employees, and every benefit you give to other employees should be the same for members of your family.

Treating family employees the same as you do other employees prevents charges of favoritism, and it may keep your business from being cited by federal and state agencies for violations of tax and employment laws.

Employment Taxes and Family Employees

Employment taxes include: 

• Federal and state income taxes that must be withheld from the employee's pay.
• FICA taxes (Social Security and Medicare taxes) that must be withheld from the employee's pay and matched by the employer.
• Federal unemployment taxes (FUTA) that must be paid by the employer based on employee pay.

Child Labor Laws

Before you hire your child (or any child) to work in your business, review the federal and state child labor laws.

Federal child labor laws restrict the hours of work, times of day, and types of work children may perform at different ages. For example, children under 18 are not allowed to operate dangerous equipment, and children under 14 are not allowed to work in any type of business.

Hiring and Paying Children

Before your children go to work in your business, check on the various types of payroll taxes to see whether you must withhold and pay these. Payroll taxes for your children as workers depends on your business type. According to the IRS: 

• If your business is a corporation, even if you control the corporation, all the money you pay your child is subject to payroll taxes. 
• If your business is a partnership, all money paid to your children is subject to payroll taxes unless "each partner is a parent of the child."

Some things you should know about paying your children to work in your business and employment taxes for children:

• You don't have to pay FUTA (federal unemployment tax) on the wages of your children under 21 years old.
• If the business is 100% family-owned and it is not a corporation or partnership, and the child is under 18 years old, no FICA tax (Social Security and Medicare) needs to be paid by the children or the business on the child's wages.
• Each child should complete all the new hire forms, including a W-4 form for withholding income taxes. If your child makes less than the minimum standard deduction ($1150 for tax year 2022), the child may be exempt from taxes and no withholding is required.
• You must withhold income taxes from the pay of children. They may get it back if their total income is not large, but you must still withhold.

For All Family Employees

If a family member is working for you without pay, this section doesn't apply. For family members who are paid by your business, you must:

• Get a W-4 form from each family member at the time of hire and withhold federal income taxes based on the information on the W-4 form.
• Withhold FICA taxes from family members and include family member pay when calculating FICA taxes your business owes.
• Include family member pay in calculations for unemployment taxes and worker's compensation.
• Pay overtime to family members in the same way as other employees. That includes paying overtime to family members who are exempt and whose income is below the threshold for overtime payments.

If you pay for holidays or sick time or provide paid vacations for other employees, you must provide family members the same paid time off. If a family member qualifies for other benefits, such as your company health plan, you must include that family member in the group. In other words, family members who are employed by your company must be provided with all the benefits of other employees.

Hiring Your Spouse as an Employee

If your spouse is working for pay in your business, you must withhold federal income taxes and FICA taxes from pay. If you are self-employed (not a corporation or a partnership), your spouse's pay does not have to be included in your unemployment tax calculations. If your business is a corporation or a partnership, you must include that spouse's pay in unemployment tax calculations.

Your Spouse as a Co-Owner

If you and your spouse have an equal say in the business, neither of you is an employee, but you may be considered as co-owners for self-employment tax purposes and a partnership for tax purposes.

Some husband-wife businesses may be considered as a qualified joint venture, which allows for more simplified reporting. The husband-wife business is more complicated than it might seem, so check with your tax advisor before starting a husband-wife business or paying business taxes for such a business.

The Bottom Line

As a general rule, hiring a family member is just like hiring anyone else. You'll have to follow the same labor laws and you'll have to pay (and withhold) the same taxes. However, a few exceptions arise when hiring your children, or your spouse, and there are some tricky rules depending on your company's legal structure. Consult with a tax professional if you're unclear on the details.