Before You Hire a Family Member, Here’s What You Need to Know

Shaun H. Ruff


Before You Hire a Family Member, Here's What You Need to Know

In small businesses, especially those with very small staff, it’s common for entrepreneurs to hire relatives. Because of their familiarity with you and their capabilities, you already know them as “employee candidates.” It is important to understand the tax implications of bringing your spouse or children into your business. I would like to point out a few of them.




When one spouse “substantially” controls the business (e.g., makes management decisions, enters into contracts, etc.) and the second spouse follows instructions from the first, a spouse is considered to be an employee. A spouse who is employed usually receives income tax withholding as well as Social Security and Medicare taxes from the company.

In FUTA (unemployment) taxes do not have to be paid for a spouse, thus treating them like other employees. A spouse whose company is a corporation must pay FUTA taxes to the IRS.

The spouses are considered partners if they operate the business together and contribute equally to its success. In their role as partners, neither is employed, and the two can file tax returns as general partnerships, using Form 1065, U.S. Partnership Income Tax Return.

Small businesses owned by married couples that file a joint tax return can elect to be treated as a “qualified joint venture” rather than a partnership by the IRS. Joint venture elections are subject to the following IRS qualifications:

  • Filing a joint tax return as a married couple.
  • It must be a joint venture between spouses only.
  • Business or trade is actively conducted by both spouses.
  • Corporations or limited liability companies (LLCs) cannot register the company as a legal entity.
  • If both spouses elect not to be considered partners, they are not considered a partnership.

Co-owners of a business who are married can elect not to have their business treated as a partnership, so they will not be required to file partnership returns but can still receive Social Security and Medicare benefits.




For example, the company would be a sole proprietorship if one spouse owns it and the other is employed. Employing a spouse as a sole proprietor does not require compensation in most states. Rather than paying payroll taxes and filing W-2s, they could provide them with tax-free fringe benefits (such as health insurance, medical leave, and retirement plans).

There is a requirement that the spouse work for the company. As evidence of a spouse’s compensation for work, it is vital to have documentation.




There are generally no requirements, but some states have specific requirements. Since wages and salaries for employees can be deducted for a business, adding a spouse to the team can be a tax benefit.

The company must place the spouse on payroll and comply with minimum wage laws and other employment regulations if the spouse works for a business entity (such as an LLC or corporation).




For family-owned businesses, hiring children is allowed if they meet state labor law requirements.

In addition to their wages (regardless of age), all working children must pay income taxes. For children under 18 whose parents own a sole proprietorship or partnership, their earnings are not subject to Social Security and Medicare taxes. The federal unemployment tax does not apply to payments to children under 21.

FUTA taxes, Social Security taxes, Medicare taxes, and income tax withholding are collected when a family business pays an employee.

  • If the child’s parent is not a partner/member of a partnership or LLC, they work for it.
  • In some cases, their employers are their parents’ or their parent’s corporations.

The IRS and the state’s labor department may scrutinize a business for hiring family members. Documentation of the work done by the owner’s children is therefore essential.




The work environment can benefit from parents’ years of experience, strong work values, trustworthiness, and loyalty. Family members who are hired by businesses must follow many of the same rules as employees.

FUTA taxes are not withheld from wages that are paid to a parent employed by their child. Income tax withholding and FICA (Social Security and Medicare taxes) are applicable.




The hiring of family members as independent contractors can help you avoid payroll taxes. The classification as contractors can, however, be determined by certain conditions. In general, businesses contract independent contractors for specific projects or durations. Businesses that violate state laws and IRS regulations can face substantial fines and penalties.

Workers are classified as employees or contractors based on three types of control:




If Employees are those who work for a business, control where they work, and use the company’s tools. Additionally, if a hiring business provides a worker with detailed instructions or training, that worker may be classified as an employee.




Employees are those whose employers provide them with financial assistance (like laptops or regular wages and salaries). The independent contractor usually purchases his or her own equipment and pays the project fee directly to the client.




It is likely that a worker will be considered an employee if they are providing services that are essential to the business’s operation, and/or if no agreement specifies that they are acting as independent contractors and having control over their work. A worker who is hired with the expectation that their services are ongoing is also considered an employee, rather than a contractor. Employee benefits (like health insurance, paid vacation, and sick days) are also considered employees, but not contractors.

AB 5 has strengthened California’s law protecting workers from being misclassified by taking an even stronger stance. Independent contractors must meet all three conditions in order to be considered independent contractors:

  • Is “customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.”
  • Performs work outside the hiring company’s usual course of business.
  • Performs work without being controlled or directed by the hiring business.

Even if family members are hired part-time during summers and holidays, business owners may find it challenging to classify them as independent contractors under IRS and state regulations.


Is your spouse an employee? Are they paid a wage?


For example, the company would be a sole proprietorship if one spouse runs it and the other is employed. Employing their spouse as a sole proprietor is not required by most states to pay them wages or salary. Rather than paying them via payroll taxes, employment tax returns, or W-2s, employers can offer tax-free fringe benefits instead (e.g., health insurance, medical leave, retirement plans).

It is important that the spouse works for the company. To demonstrate that the spouse receives benefits as compensation for work performed, documentation is essential.


Do LLC and corporation owners have the right to hire their spouses?


There are generally no requirements, but some states have specific requirements. Since wages and salaries for employees can be deducted for a business, adding a spouse to the team can be a tax benefit.

The company must place the spouse on payroll and comply with minimum wage laws and other employment regulations if the spouse works for a business entity (such as an LLC or corporation).




You should think twice before bringing your family into your business


Your business needs to understand and comply with any federal, state, and local employment laws that apply to it when hiring a new employee. If you have questions regarding legal, accounting, or HR issues, you may benefit from consulting professionals with in-depth knowledge in those fields.

When it comes to hiring family members, the more knowledge you have, the more preparation you will have-and the more peace of mind you will have.


CALL TODAY (657) 258 – 0577 OR email us at [email protected]!





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Other resources you may like:

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Ways For Businesses to Reduce Cybersecurity Risks in Mergers and Acquisitions

Cybersecurity and Family Offices – MCDA CCG, Inc.

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