It’s not unheard of for business owners to hire their family members. In fact, approximately 90% of U.S. businesses are family-owned or controlled. With so many other businesses hiring relatives, you might be itching to do the same.
Before hiring family members, find out your employer obligations, steps to onboard a relative, and the pros and cons of working with family.
Is hiring family members legal?
You might be thinking, Is hiring a family member illegal? The short answer is no. It’s common for small, private, or family-run businesses to hire family members.
In most cases, hiring family members is not illegal, but it can depend on the job or company. For example, if you work for the government, hiring a family member might be considered a conflict of interest.
If you do hire relatives, you must still remain compliant with local, state, and federal laws and withhold the proper taxes from their wages. Before you hire a relative, review all applicable laws to ensure you are keeping things legal.
Steps for employing family members
If you plan on hiring a family member, you need to have a heads up on what to do to successfully onboard them as an employee. Follow the four steps below when employing a loved one.
1. Brush up on laws
As mentioned, you must know what you’re getting into when it comes to employing relatives. Before you begin hiring your relatives all willy nilly, brush up on all federal, state, and local laws.
Find out which laws you must follow as well as the taxes you must withhold from your family member’s wages.
Check with the IRS as well as your state and locality before you make any decisions about hiring family.
2. Complete new hire paperwork
Like with any other employee, you need to have family fill out new hire paperwork. Your relative must fill out the following:
- Form W-4
- A state W-4 form (if applicable)
- Form I-9
- Other HR documents (e.g., employee handbook acknowledgement form)
You are also responsible for reporting new hires, including members of your family. Employers must report new hires within 20 days of hiring them. Keep in mind that state laws for new hires may differ, so be sure to check with your state about new hire laws and requirements.
3. Add the family member to payroll
To pay a family member, you need to add them to your payroll. Use new hire paperwork to help you add your family member to payroll (e.g., number of withholdings on Form W-4).
If you use payroll software, add your family member as a new employee in your system. If you handle payroll by hand, calculate the family member’s payroll taxes using information from their forms.
Don’t forget to pay your employee (e.g., via check, direct deposit, etc.) and provide them with a pay stub that lists their gross pay, net pay, taxes, and deductions.
4. Withhold and pay payroll taxes
One of your biggest responsibilities as an employer is paying payroll taxes. Federal payroll taxes include:
- Federal income tax (employee-only)
- Social Security tax (both employee and employer)
- Medicare tax (both employee and employer)
- FUTA tax (employer-only)
Depending on your state, you might also need to withhold state unemployment tax (SUI or SUTA tax) and state and local income taxes. Check with your state for more information about state-specific taxes.
In addition to withholding taxes, you must also remit them to the correct agencies (e.g., state or federal governments).
How frequently you pay certain taxes depends on your business. You also likely need to use payroll tax forms to file and pay different taxes. For example, you might need to file Form 941 to report federal income, Social Security, and Medicare taxes.
Taxes for family members
When it comes to hiring family members, you’re not off the hook for taxes.
You might need to contribute and/or withhold some of the following taxes if you employ a family member:
- FICA tax (Social Security and Medicare taxes)
- FUTA tax
- If applicable, federal and state income tax withholding
The type of tax and whether you can tax a family member depends on the relative’s relationship to you, their age, and your business structure.
There are specific tax rules you must follow when you employ your child, spouse, or parent. Take a look at the handy chart below to see what type of taxes you must withhold or contribute when it comes to employing a relative. Remember, FUTA tax is an employer-only tax, so do not withhold it from any employees’ wages.
| Tax Type | Child Employed By Parent | Spouse Employed By Spouse | Parent Employed By Child |
|---|---|---|---|
| Income tax withholding | Yes | Yes | Yes |
| FICA tax | No (if under 18) Yes (if 18 or older) | Yes | Yes |
| FUTA tax | No* | No | No |
*Pay FUTA tax when a child is over 21 and works for a corporation, partnership, or an estate.
Keep in mind certain laws (e.g., child labor laws) can vary from state to state. Be sure to check with your state and the IRS for more information about family taxation.
Pros and cons of hiring family members
Before employing any relatives, take a step back and think about how hiring your family member will affect your business. Take a look at some pros and cons of hiring family below before making any rash decisions.
Pros
Take a look at some advantages of hiring family members below.
1. You know who you’re hiring
When it comes to hiring relatives, you know what you’re going to get. There are no surprises since you already know them and their skill set.
You know who you’re hiring and you don’t have to worry about wasting time and money on background checks or other screenings.
Instead of hiring an unknown candidate, you might hire a family member you trust with the job. That way, you know ahead of time if they’re reliable and hard-working. Not to mention, you know whether or not they will fit in at your small business.
2. You know their strengths and weaknesses
You know your family members. After all, you’ve probably known them for years or even decades. You’ve had plenty of time to learn all about who they are. And, you know all of their strengths and weaknesses.
Before hiring a family member, think about what they’ll bring to the table with their strengths and faults. How will their strengths build up your business? Will their weaknesses clash with the role? Use their strengths and weaknesses to determine whether they’re a good fit for the job.
Cons
Check out a few cons of hiring family members.
1. Family members might not be qualified for the job
Sometimes you just have to face the fact that a person is not right for a job, especially if the individual is a family member.
As a business owner, remember that just because they’re family doesn’t mean they’re a good fit for the job.
Instead of passing top-notch candidates by, consider all of your options. Interview all candidates, including family, then choose the best person for the job. You definitely don’t want to hire anyone if they’re unqualified for a job. It can cause you to miss out on top talent and put a dent in your business’s success.
2. Might send a bad signal to other employees
Hiring family members can put a bad taste in other non-family employees’ mouths. They might think that family members are receiving special treatment or favoritism. Not to mention, non-family members might feel they don’t have as many opportunities as family members.
Make sure you treat all employees the same and use the same disciplinary actions on both family and non-family members.
3. Family members might be less productive
If you hire a family member, your relative might think it’s OK to be a slacker. Some family members might take advantage of their position at your business and use it as an excuse to be lazy.
With laziness comes low productivity, which could spell doom for your small venture. Before hiring a family member, think about what kind of an impact they’ll make on your business. Will they help boost productivity? Or, will they hold your business back from success?
Have you recently hired a family member or employee? If so, it’s time to add them to payroll! Patriot’s payroll services lets you streamline the way you pay employees so you can get back to your business. Start your free trial today!
This article has been updated from its original publication date of December 11, 2019.
This is not intended as legal advice; for more information, please click here.