What You Need to Know When Hiring Family
A lot of business owners hire family members to work for them. Sometimes it works well and sometimes not so well. It’s important that you follow formal business standards and communicate in a professional manner with employees that are related. This is especially important if things aren’t working out and you have to terminate a family member’s employment.
If you do have to terminate a relative, keep it professional. Set up a formal “termination” meeting. You may want to invite a direct supervisor or a human resource professional to appropriately represent your company. This may also help to prevent the meeting from turning into an emotional argument. Below are some of the pros and cons to think about when you're considering employing family members.
Hiring your children
When you hire your children for a summer job or part-time job, it usually has more tax advantages and fewer obstacles than hiring other relatives. One financial advantage is that when you’re paying your child to do useful work, your business may get a tax deduction for the wages paid. Also, your child is likely to pay little or no income tax, and the after-tax wages stays in the family.
There are steps you can take to ensure the wages are fully deductible. For example: Your child must be doing a real job that helps your business, and be paid a reasonable wage for the work performed. You will need to keep detailed records of any hours worked, pay the child regularly, and if possible, pay them on the same schedule as other employees. You should treat your child just like any other employee.
Also, depending on how your business is structured and the age of your child, you may be able to avoid paying Social Security, Medicare, and unemployment on their wages. However, to qualify, your child must be under the age of 18 and you must be a sole proprietor or a husband-wife eligible partnership.
Hiring your spouse or other relatives
One benefit to hiring your spouse or other relatives is that you know this employee well, and they may tend to be more motivated or flexible than a non-family member. This is also a great way for a family owned business to train the next generation to take over the business when it's time.
Hiring family may also have some disadvantages because very few families are without some internal or intergenerational conflicts. If these conflicts show up in the workplace it may be disastrous, as it could also affect your other employees. Also, any sign of unequal treatment or favoritism towards family may cause resentment and ruin the motivation of your other employees.
Use caution moving forward
While many businesses that hire family members have no issues, it doesn’t always work out well. It’s important that you communicate in a professional manner with employees that are related and follow formal business standards. So, before you hire family, talk to them as well as your key employees so that everyone knows their role in the business.
At Summit CPA, we offer multiple resources that will help get your business on the right track. Contact our office at 866-497-9761 to schedule an appointment with our Virtual CFO.