Hiring Family Members in Your Business

Payroll and Employment Tax Issues

Family working together in family-owned business
••• Peathegee Inc/Getty Images

There are no laws against nepotism (hiring family members) in a private business, but laws exist to prevent nepotism in government positions. Having family members working in your business does present some unique tax and employment situations.

Hiring Family Members

It's best to remember one rule when employing your spouse, child, parent, or other family members: treat the family member the same as any other employee.

In some cases, children must be treated differently, 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 family members.

Employment taxes include: 

  • Federal and state income taxes
  • FICA taxes (Social Security and Medicare taxes), and 
  • Federal unemployment taxes (FUTA) 

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 and state laws may be different, and the strictest law is controlling, so be sure to look at both. 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.

If you are the sole owner of your business and your business is not a corporation, you have fewer limitations: your children still cannot do hazardous work, but they are not limited on the hours or days of work.

State laws for hiring children may be different, so check with your state's employment division, or use a federal wage and hour map to find information on child labor laws in your state

Hiring and Paying Children

Before your own children 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." (This seems to mean that if any partner isn't a parent of a child working in the business, the wages of the child are subject to payroll taxes.)

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 wages of your children.
  • If the business is 100% family owned and it is not a corporation or partnership, no FICA tax (Social Security and Medicare) needs to be paid by the children or the business on the child's wages.
  • Have each child complete all the new hire forms, including a W-4 form for withholding income taxes. If your child makes less than $800 a year 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, at 1 1/2 times base pay and after 40 hours in a work week. 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.