Should you hire your children? Hiring your children for the summer or part-time usually has more tax advantages and fewer drawbacks than hiring other kinds of relatives. What makes it financially better is that if you're paying your child to do useful work, the business gets a tax deduction for the wages paid. Your child will probably pay little or no income tax, and the after-tax wages get to stay within the family. And, an added benefit if your child is under 18 and your business is unincorporated, neither the child nor the business need to pay federal payroll taxes. This exemption also applies to a partnership or LLC if the only partners are you and your spouce.
You will want to follow certain steps to make sure the wages are fully deductible. Your chid must be doing a real job that helps the business, and the wages must be reasonable for the work performed. Keep detailed records of hours worked and pay salary regularly, preferably on the same schedule as other employees. In other words, treat your child just like any regular employee.
Should you hire your spouce or relative? Hiring your spouce or other relatives generally doesn't bring the same payroll tax savings. However, it does bring up other pros and cons. The pros are that you have an employee whom you know very well, and who may be more motivated or more flexible than a non family member. And in many family-owned businesses, it is an efficient way to teach the next generation who may take over leadership of your business some day.
But that same familiarity can bring cons as well. Few families are without some internal or intergenerational conflict, and that can be disastrous and stressful if it spills over into the workplace. You must also consider the effect on other employees. Any sign of favoritism or unequal treatment can cause resentment and ruin the motivation of other employees.
The moral of the story? Be cautious. And think long and hard before you bring family members into the businesss. Talk to them and to your key employees beforehand, and make sure everyone understands and is comfortable with their future roles in the company.
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