The decision to hire family members for your business is a delicate balancing act that involves both personal and professional considerations.
Working with loved ones can create a sense of trust and unity within the workplace and has been shown to increase business resiliency. However, mixing family and business may create challenges as familial dynamics overlap with professional responsibilities and undermine the morale of nonfamily staff members.
Outside of some legal and tax implications, family members should be treated no differently than regular employees. This is easier said than done, but if you can pull it off, your business could prove to be a lasting family legacy.
Family-Owned Businesses Dominate the US Economy
A 2021 study on the contribution of family businesses to the United States economy found that family-owned enterprises constitute 87 percent of all US businesses. The study also found that the number of family businesses increased from 24.2 million in 2003 to 32.4 million in 2021. They employ 59 percent of the private sector workforce, account for more than 83 million jobs, and generate 54 percent of private sector GDP ($7.7 trillion).[1]
Pros and Cons of Working with Family
Compared to other businesses, family businesses experience sustained success, which could be a result of their prioritization of longevity over short-term gains, positioning them to survive tough times. Research from the Harvard Business Review suggests that family businesses emerged in better economic shape than their competitors after the pandemic.[2]
Trust and loyalty, shared vision and values, and a personal investment in the company that extends beyond one’s own lifetime can contribute to family businesses being more resilient and long-lasting. On the other hand, interpersonal conflicts, a lack of professional boundaries, and nepotism could create a dysfunctional workplace.
Leveling the Playing Field in Family Businesses
Whether the dynamics of a family business prove to be a competitive advantage or disadvantage depends largely on how the company is run. Since many family-owned businesses hire a mix of family and nonfamily employees, avoiding double standards that can foster nepotism concerns is essential.
The following practices can help keep things professional in a family-owned business:
- Hire only qualified family members. Maintain consistent hiring standards that do not favor family members. Focus on job qualifications first. Do not hire someone just because they are family.
- Treat everyone the same. Giving preference to family members can foster resentment among other employees and harm company culture.
- Use an employment contract and handbook. Establish universal standards for workers that are stipulated in an employment contract and employee handbook. Ensure that all employees, whether family members or not, receive pay, benefits, and treatment according to one set of rules.
- Discipline or fire an underperforming family member. Do not be afraid to promote a family member for good performance—but also be prepared to crack the whip if they do not
- Keep work at work. Talking about work at home can be problematic even when family members do not work together. Creating clear boundaries between work life and home life is arguably even more important when family members do work together.
Tax and Legal Implications for Hiring Family Members
From a business standpoint, treating family and nonfamily employees differently can be disastrous. But from a tax and legal standpoint, not all employees—and not all relatives—are entitled to equal treatment.
Child Labor Laws
The Fair Labor Standards Act (FLSA) sets the minimum age for employment and generally limits the number of hours that youth under the age of 16 can work.
FLSA child labor rules, though, do not apply to children younger than 16 working in nonagricultural employment in a business owned solely by their parents. In such cases, those children can work any time of day for an unlimited number of hours if they are not employed in manufacturing, mining, or an occupation the Secretary of Labor deems hazardous.[3] Children of any age may be employed at any time and in any occupation in agriculture on their parents’ farm. There are only a few exemptions from the rules prohibiting children from working in hazardous occupations.
Tax Laws: Children, Spouses, and Other Family Members
When parents employ their children, not only do some child labor laws not apply, but the parents may also be eligible for tax breaks.
Children hired to perform legitimate work for their parents’ business can be paid up to $14,600 (the standard deduction for single filers in 2024) without owing income tax. In addition, parents can deduct the salary they pay their children as a business expense, thereby lowering their business’s overall taxable income. And as long as a child relies on their parents for financial support and meets certain Internal Revenue Service dependency requirements, the parents can still claim the child as a dependent.
Here is how tax withholdings for children employed in the family business work:
- Children younger than 18 are not subject to Social Security, Medicare, or Federal Unemployment Tax Act (FUTA) taxes if their parents’ business is a sole proprietorship or a partnership and each partner is a parent of the child.
- Children ages 18 to 20 are exempt from federal unemployment taxes but must pay Social Security and Medicare taxes (i.e., FICA taxes).
- When they reach age 21, a child employee is treated the same as every other employee and is fully subject to FICA and FUTA taxes.
- Child wages could be subject to payroll taxes if the family business is a corporation or the child’s parent is in a business partnership with a nonspouse.
Spouses who operate a business together as a partnership for tax purposes are subject to income tax withholding, Social Security, and Medicare taxes, but not FUTA taxes. The same taxes apply to a spouse who is classified as an employee of the other spouse.
For a parent employed by their child, the parent’s wages are subject to income tax, Social Security taxes, and Medicare taxes, but not federal unemployment taxes.[4] Other family members, including aunts and uncles, nieces and nephews, and grandchildren, must pay FICA and FUTA taxes like any other employee.[5]
Setting Your Family Business Up for Success
Successfully integrating family members into your business requires a proactive approach to communication, the establishment of unbiased standards, and a commitment to fostering a healthy work environment for all employees. To achieve this, you may benefit from an unbiased, professional perspective about workplace policies, as well as ways to maximize the tax and legal benefits of hiring family members. Schedule a meeting with us to learn more.
[1] Daniel Van Der Vliet, Measuring the Financial Impact of Family Businesses on the US Economy, FamilyBusiness.org (June 2, 2021), https://familybusiness.org/content/measuring-the-financial-impact-of-family-businesses-on-the-US-ec.
[2] Josh Baron & Rob Lachenauer, Do Most Family Businesses Really Fail by the Third Generation?, Harv. Bus. Rev. (July 19, 2021), https://hbr.org/2021/07/do-most-family-businesses-really-fail-by-the-third-generation.
[3] U.S. Dep’t of Labor, FLSA – Child Labor Rules Advisor, eLaws Advisor, https://webapps.dol.gov/elaws/whd/flsa/cl/exemptions.asp (last visited Feb. 23, 2024).
[4] Joshua Wiesenfeld, Hiring Family Members in a Small Business, J. Acct. (June 2, 2022), https://www.journalofaccountancy.com/news/2022/jun/hiring-family-members-small-business.html.
[5] Kaytlyn Smith, What to Know about Taxes When You’re Running a Family Business, CO (Oct. 23, 2023), https://www.uschamber.com/co/run/finance/taxes-for-family-business.
