- It is legal to hire family members, but you should be aware of the special tax requirements for this situation.
- The benefits of working with family include more trust and a sense of dedication to a shared goal, while the downsides are potential damage to the relationship and abuse of power.
- To successfully work with family, you must establish clear expectations and boundaries right from the start.
- This article is for small business owners considering hiring and working with their own family members.
Working with your family members can be a wonderful way to grow closer and benefit your business – or it can be a frustrating and problematic situation. If you're considering hiring family members, know that it will take a lot of preparation, dedication and communication to make it work. Before deciding whether to hire a family member, you should understand the pros and cons of doing so and how to hire them the right way.
Should you hire family?
Since family is about as personal as it gets, whether you should hire a family member depends on various factors. The first step is to think carefully about your reasons for working with family. Is it because you genuinely believe they will bring value to your business, or is it because they need a job and you feel obligated to help them? You must also consider your relationship with the family member(s) and whether you think you can maintain a professional relationship at work.
"You've worked really hard to get your business where it is today," said Meaghan Thomas, co-owner of Pinch Spice Market, in an interview with Business News Daily. "You need to be able to trust that your family member takes it as seriously as you do. If you hire a family member that ends up being a bit of a mooch or a slacker – or, on the flip side, you end up being a mean, unsupportive boss to them – you're going to have problems that could seriously hurt your relationship."
You want to think about your own goals for your business as well as the goals of your family member. Do they share your goals? Do they have a vision for your business? Having goals and a vision in common can go a long way to promote a good working relationship and make it easier to work professionally with family.
Key takeaway: Before deciding to hire or work with a family member, carefully consider whether that family will add genuine value to your company.
Is it legal to hire and work with family?
It is completely legal to hire and work with family members. However, because nepotism (favoritism toward family members) can be a divisive topic in the workplace, it is a good idea to have strict policies in place that prevent any preferential treatment.
Taxes and family members
Taxes can be complicated when your employee is also your family member. When it comes to adult family members, you can generally treat them the same as your regular employees, but if you employ your child, there are some unique tax situations and labor laws to consider. For example, children under 18 are not permitted to operate dangerous machinery, and it is illegal for children under the age of 14 to work at all. Carefully review both federal and state laws, as they may vary.
Before your child begins work in your business, you must look into how you will pay and withhold their payroll taxes, since they will depend on what type of business you run. These are the IRS rules for the situation:
- If your business is a corporation, all the money you pay your child is subject to payroll taxes.
- If your business is a partnership, all the money you pay your child is subject to payroll taxes, unless both partners are parents to the child.
If you hire your spouse as an employee, you must withhold federal income taxes and FICA taxes from their pay. If your spouse is a co-owner of your business, you can file as co-owners for self-employment tax purposes, or as a qualified joint venture, which can simplify your tax reporting.
For all adult family member employees, you must do the following:
- Have them fill out a W-4 form upon hiring, and withhold federal income taxes according to the information on their form.
- Withhold FICA taxes and include family member pay when calculating your business's FICA taxes.
- Include family member pay when calculating unemployment taxes and workers' compensation.
- Pay overtime to family members the same way you do for regular employees.
- Provide the same benefits (paid time off, sick time, health insurance) to family members as you do to regular employees.
Key takeaway: It is legal to hire family members, but there are special tax considerations for this situation.
Pros and cons of working with family
There are many benefits and drawbacks to working with family. On one hand, it can mean a loyal and trusted confidant; on the other, it can mean a tense and unprofessional relationship that doesn't add value to your business. Here's what some real small business owners who work with family members had to say.
- You trust and are honest with each other. "They know you inside and out," said Thomas, who co-owns Pinch Spice Market with her partner. "They can lift you up when you need it and call you on your baloney when you need to be grounded. You can be totally honest with them."
- They're dedicated to you and the business. "In many cases, your relationship can make the family member more loyal to you and your cause," said Ryan Cook, digital marketing specialist and entrepreneur. "If you come from the same family, you probably have a lot of the same beliefs and attitudes, which can reduce disagreement and friction."
- It's an opportunity for children to gain experience. "[A family business] can be a chance for a young person to gain valuable working experience, setting them ahead of their peers when they are able to enter the general workforce," said Tyler Read, CEO of PTPioneer. "However, it can be a con in the kid's eyes if they are forced into work they don't want to do."
- You could save money. "There can be a major financial benefit of working with your significant other, because you can share an accountant, a tax preparer, a cell phone plan and several other expenses that unrelated colleagues can't share," said Nerissa Zhang, CEO of The Bright App.
- Work never goes away. "If you don't set the right boundaries, being together all the time can get old, and you can start to feel like you don't have any autonomy," Thomas said. "You take work home with you – it's hard to 'turn off' when your business partner also sits at the dinner table with you. It's so important to define work and life space, and try to not have them overlap too much."
- They might come to resent you. "If you are offering a family member a job in something they aren't particularly interested in, just to help them out or for whatever reason, this is where problems could brew, as one could become resentful of the other's success or happiness in their job," said Michael Lowe, CEO of CarPassionate.
- They may abuse the relationship. "Family members may be more prone to disobey company protocol, since they can leverage their relationship with you," said Cook.
- It could affect your relationship. "Layoffs might be the toughest thing to do," said Michael Tomaszewski, CPRW and career advice writer at Zety. "Whatever reasons you have to let someone go, firing a family member will make you want to eat bubble wrap. There's just not a good way to do this without ruining personal relationships, possibly with the whole family."
Key takeaway: There are many advantages to working with family members, like a high level of trust and possible cost savings, but there are drawbacks too, such as the potential for abuse of the relationship.
How to properly hire and work with family members
Hiring family members is not a decision to take lightly. Here are some tips to help you successfully hire and work with your family members.
1. Set clear expectations.
The best way to start your working relationship with a family member on the right foot is to clearly communicate what you expect of them. Provide a job description that outlines their duties, responsibilities, and functions and makes it clear whom they report to, if not to you.
2. Treat them like any other employee.
This is key – if your other employees feel that the family member is getting preferential treatment, it can cause resentment and discord, which makes for an unpleasant company culture. On the other hand, you don't want to abuse your relationship with your family member and mistreat them. Ensure that all your employees, family member or not, receive equal benefits, pay and treatment.
3. Ensure they are qualified for the job.
Many small business owners fall into the trap of hiring a family member just because they are family, not because they're the best person for the job. Though it may seem like the right thing to do in the moment, this can hurt your business in the long run. If you're considering hiring a family member, make sure they have the qualifications and experience necessary to do the job – and do it well.
4. Have a plan in case it doesn't work out.
It's important to prepare for the possibility of terminating your working relationship with a family member, whether that's letting them go because you no longer need their services or firing them. Because there is an extra layer of complication with a family member, make a plan for how to communicate this change to them while maintaining your personal relationship.
5. Communicate your expectations for your relationship at work.
If you want to maintain a professional relationship at work, clearly communicate that to your family member before they're popping into your office and sitting on your desk during their breaks. Setting boundaries for while you're in the workplace can make it easier to separate your personal relationship from your professional one.
Key takeaway: When you hire family members, set clear boundaries and keep an open line of communication so they know your expectations.
Examples of successful family-run businesses
If you're concerned about employing family members, take a look at these five successful family-run businesses that have found ways to make it work.
One of the most famous family-run businesses, Walmart was founded by Sam Walton, who passed the business down to his three children. The Walton family currently owns more than half of the Walmart business at a market cap of $241 billion.
Comcast is another successful family-owned business. Ralph Roberts founded it as a small cable company in Mississippi, growing it into a billion-dollar empire before he passed the business down to his son.
Samsung was founded by Lee Byung-chul in 1938 as a dried foods export business and has grown over the years to be the largest conglomerate in South Korea. Samsung is now run by Byung-chul's grandson, Lee Jae-yong.
Another famously successful family-run business, Nike is headed by the Knight family. Phil Knight founded it at the University of Oregon in 1964, and it's now valued at $110.3 billion. Knight's son Travis was appointed to Nike's board of directors in 2015.
The Mars company was started in 1911 by Frank C. Mars, who made and sold homemade butter candy. The company has been passed down to family members who now own Mars Inc. and sit on the board of directors. The Mars family is worth an estimated $78 billion.