Many business owners hire their children, their spouse, or other family members to work in the business. Sometimes this works out well; sometimes it causes problems. Let’s look at the pros and cons.

• Hiring your children. Hiring your kids for a part-time job usually has more tax advantages and fewer drawbacks than hiring other relatives. The financial advantage 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 stay in the family. Also, if your child is under age 18 and your business is unincorporated, neither the child nor the business need pay federal payroll taxes. This exemption also applies to a partnership or LLC if the only partners are you and your spouse.

Follow certain steps to make sure the wages are fully deductible. The child 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.

• Hiring your spouse or relatives. Hiring your spouse or other relatives generally doesn’t bring the same payroll tax savings. However, it does bring other advantages and disadvantages. The advantages are that you have an employee whom you know well, and who may be more motivated or more flexible than a nonfamily member. And in many family-owned businesses, it’s a powerful way to train the next generation who will take over leadership.

That same familiarity can bring disadvantages, however. Few families are without some internal or inter-generational conflict, and that can be disastrous 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.

• Be cautious. So think long and hard before you bring family members into the business. Talk to them and to your key employees beforehand, and make sure everyone understands and is comfortable with their future roles in the company.



David Compton is a Certified Public Accountant with offices in Meridian and Birmingham, Ala.