Should I Hire My Family?

Today many small businesses are turning to family members to help them with small businesses.  I won't discuss the politics and soundness of that decision (sometimes this can work, many times it's a recipe for disaster), here are some business ideas you need to look at when hiring family members.

One way to reduce the overall family tax bill is by employing family members to work in your business by shifting income to them and providing them with employment benefits.

• Employing your Spouse. Reasonable wages paid to your spouse entitles you to a business deduction. Although the wages are subject to both income and FICA taxes, your spouse may qualify for Social Security benefits to which he or she might not otherwise be entitled. In addition, your spouse may also be entitled to receive coverage under the qualified retirement and health plans of your business, allowing you to obtain business deductions for contributions to your spouse's retirement nest egg and health insurance premium payments made on behalf of your employed spouse. While maintaining the same family medical care coverage, you increase your business deductions by providing your spouse with family health insurance coverage as an employee.
• Employing your child. By employing your child, the income tax advantages include obtaining a business deduction for a reasonable salary paid to that child, thus reducing your self-employment income and tax by shifting income to the child. Since the salary paid to your child is considered earned income, it is not subject to the "Kiddie Tax" rules that apply to children under the age of 19, as well as some older children. The maximum standard deduction available to your child in 2011 is $5,800 if he or she has at least that amount of earned income. Therefore, the standard deduction eliminates all tax on this income if you pay your child $5,800 in compensation. If your business is unincorporated, wages paid to your child under age 18 are not subject to social security taxes. Not only are there significant income tax advantages to employing your child, but you may provide him or her with fringe benefits such as group-term life insurance and qualified pension plan contributions.

Your child may also make deductible contributions to an IRA of the lesser of earned income or the annual limitation. These contributions can offset earned and unearned income. As example, in 2011 your child could receive $10,800 gross income ($5,800 earned and $5,000 unearned) by combining the IRA deduction ($5,000) with the standard deduction ($5,800) and pay no tax. You should consider giving him or her part or all of the money needed to fund the IRA (as part of your $13,000/$26,000 annual exclusion for gifts) if your child does not want to use his or her earned income to fund an IRA contribution.

Please keep in mind that when you employ a family member in your business, the wages should be reasonable for the work performed and that the services performed are necessary to the business.  Also, it's often easy to overlook the disruption among your other staff that family can sometimes cause (have seen this with many clients over the years).  Finally, if you're a professional company or one that has to have licensed staff, while hiring Mom, Dad, or Junior to work for you, make sure they have the proper licensure as well to work for you.  It's easy to hire those you know without taking into consideration what they need (or have to have) in order to do the job.



Follow me on the Web, Facebook or Twitter for more information.