You need help in your small business, but you’re reluctant to hire employees with all the potential problems that entails. Have you considered hiring your family members instead?
There are some real advantages to hiring family, including potential tax breaks, greater loyalty, and the possibility of keeping your business in the family when you’re ready to retire or sell. (The most recent PWC survey of family businesses found the majority are optimistic about the future and expect their businesses to grow in the next five years)
Involving your young kids in the business can teach them valuable lessons about what hard work can accomplish and make them feel involved in your success. Plus, you can get a tax break from the Internal Revenue Service. By paying minor children, you can move family income out of a higher tax bracket (yours) into a lower one (your children’s) and at the same time transfer wealth to your dependents without incurring federal estate and gift taxes.
Not convinced yet?
Here are three tips to help you stay out of trouble when hiring family members:
1. Understand Rules and Regulations
Make sure you understand IRS rules and regulations for hiring family members. In a nutshell, employment wages paid to children under 18 who work for their parents’ sole proprietorship or partnership are not subject to Social Security and Medicare taxes, and children under 21 are not subject to the Federal Unemployment Tax Act (FUTA) tax. When it comes to income tax, all children, no matter what their age, are subject to tax withholding.
If you hire your spouse, the rules vary depending on what kind of business structure you’ve set up. And if you hire a parent, the parent employee is subject to income tax withholding, as well as Social Security and Medicare taxes, but not FUTA tax. For more information on family business tax issues, visit the IRS website.
2. Conflict Management
Conflict is a risk when families work together. However, you can keep conflict to a minimum by communicating before issues get out of control and anger builds up. All parties involved need to feel their opinions and feelings are respected. If you see a looming, unresolved issue in the near future, consider getting outside help from a mentor or therapist. Having an unbiased third party involved can eliminate some of the stress from the inevitable confrontation.
3. Define Roles
Be clear about who’s doing what. Clearly define job roles and responsibilities from the start, and put them in writing. If you have plans to pass the business down to a particular family member, put that in writing, too, so everyone knows what the future will bring.