If you have a family member working at your business, you probably know you need to avoid nepotism. You wouldn’t hire a less-qualified or unqualified family member, pay them more, promote them, or allow them to defy company policies because of their relationship to you.
But even if your family hire is qualified, receives a fair salary, and is following all of the rules and policies you’ve spelled out for the rest of your staff, there are also payroll, benefit, and tax implications to keep in mind. Here are some of the basics you need to know:
Adult Family Members
For adult family members who are your employees, you need to include the same withholdings in their pay and provide the same pay benefits.
Employment Taxes to Withhold:
- Federal and state income taxes. Have them complete a W-4 form at the time of hire.
- FICA taxes (Social Security and Medicare taxes)
- Federal unemployment taxes (FUTA). Include family member pay in calculations for unemployment taxes and worker’s compensation.
Benefits to Provide:
- If you pay overtime to other employees, pay family members in the same way.
- If you provide for paid time off to other employees, including holidays, sick time, and paid vacations, pay family members the same.
- If you have a company health plan and a family member qualifies for that benefit, include them in the group.
Child Family Members
Before you hire your child (or any minor), review the federal and state child labor laws. Then, follow these payroll and employment tax guidelines:
- Have your child complete all the new hire forms, including a W-4 form for withholding income taxes. Yes, you need to 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.
- 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.
- You don’t have to pay FUTA.
- If the business is 100% family-owned and it is not a corporation or partnership, no FICA tax needs to be paid by the children or the business on the child’s wages.
- If your spouse is working for pay in your business, you must withhold federal income taxes and FICA taxes.
- 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. But if you are a corporation or a partnership, you must include your spouse’s pay in unemployment tax calculations.
- If your spouse is a co-owner, it gets more complicated. There are scenarios where you are considered co-owners, a partnership, or a qualified joint-venture, and each has different tax implications.
For the sake of family harmony and compliance, it’s important to make sure all of your tax, payroll, and benefits issues in order and all above board. It can get complex, so if you have any questions at all, reach out to us for help.
Hiring Family Members In Your Business