Tax Benefits of Hiring Family Members to Work for Your Business

Family-owned businesses have been around for generations. When you own your own business, it is important to understand how your tax situation will change and what actions can be taken to reduce your tax liability legally. In the case of family-owned businesses, there are certain tax advantages that may be recognized by employing family members—as long as you follow the rules set forth by the IRS.

Let's look at some of the benefits of hiring family members to work for a family business.

Tax benefits of hiring family members

There are several ways in which the hiring of a family member to work for a family-owned business can be advantageous:

• Children (under age 18) employed by a parent who is a sole proprietor or business that is unincorporated are not subject to FICA taxes. Since the child in not responsible for their half of the taxes, neither is the business.
• Wages paid to children reduce the net income of the business, in turn reducing the amount the parent pays in self-employment taxes.
• Income paid to the child is taxed in a lower tax bracket than that of the parent. This helps reduce the tax burden across the board.
• Insurance costs and other benefits paid to a family member can be used as a tax deduction by the business owner (parent).

If you are thinking about adding your child or spouse to the payroll, keep in mind that the IRS will pay close attention to how your business is being handled and is a bit more likely to audit your business.

It is smart to take advantage of any tax breaks you may see by employing your child or other family members; however, you must be sure they are bona fide employees. If you are simply attempting to reduce your tax burden without actually providing documentation of hours worked and duties performed, you may find yourself in hot water with the IRS.

Another important factor to remember is that when hiring your child to work for a family business is that all child labor laws must be adhered to as well. Special privileges are not extended to parents who bring their children into the family business.

Other benefits of hiring your spouse or child

Whether you are hiring your spouse or your child, you are bringing them into a very important aspect of your life and the foundation of the family. You can teach your children the importance of having a strong work ethic, and they can see both the rewards and hardships associated with self-employment. This may help them make a decision regarding which direction they would like to go when the time comes to choose a career path.

Children of self-employed parents often have greater confidence in their ability to follow their own dreams, or, in some cases, follow in their parents footsteps as successors of the family-run business.

More articles from AllBusiness.com:

• How to Balance Being a Parent and a Business Owner
• Pros and Cons of Friends and Family Financing
• Partners in Life and in Business: How Married Business Owners Make It Work
• Is Your Child Ready for a Paycheck? Hire Your Kids and Get a Tax Break
• 5 Important Steps Every Young Entrepreneur Must Take When Starting a Business