Article

What Your SMB Needs to Know Before Hiring Family Members

August 23, 2022

Jump to a section
Share it!
Sign up for our newsletter
You're all signed up! Look out for the next edition of The Manual Weekly coming Wednesday am!
Oops! Something went wrong while submitting the form.
This is some text inside of a div block.

Good help can be hard to find. Thankfully, you’ve got a source of people who will always have your back: family.

Maybe you want to introduce your spouse or your kids to the day-to-day of your small family business. Or maybe your employees are persuading their own family members to come and work for you. (We’re big fans of that here at Trainual — we have five pairs of siblings on our team, including our own CEO and CMO duo, the Ronzio brothers!)

In whatever case, it can be a good idea to bring your family into your business.

Because when it comes to family or close friends, they’ll support you through thick and thin. They’ll work hard to make sure your business is a success. And because you know them so well, you’ll already have one of the most important traits of a good employee-employer relationship — trust.

But hiring family can be a bit more complicated than you might think. Whether you dream of building a “Succession”-style empire or running a smaller family business that looks like something straight out of “Bob’s Burgers,” there are some considerations you’ll need to take into account before you start onboarding your family members.

A close up on a serious man saying, "Family."

The pros and cons of hiring family members

Like with any business decision, there are good and bad sides to the choice of hiring family.

Pro: A truncated hiring process.

Typically, when you hire someone, you’re going through a long and involved hiring process. Once you’ve sorted through stacks of applications and cover letters, you’re interviewing with multiple different candidates. And in those interviews, not only are you figuring out whether your candidate has the skills and experience to handle this new role, but you’re also trying to determine if their personality will mesh well with the rest of your team and your company’s culture. Plus, there’s all the extra stuff that comes with hiring, like background checks and contract negotiations.

On the other hand, you might have a candidate waiting for you on a silver platter. If you have a family member in consideration for one of your team’s roles, you already have a good idea of their strengths and weaknesses in the industry. Plus, you know them, so when the question about fitting into your squad comes up, you’ll already have a “yes” or “no” in mind.

Con: Is this nepotism?

It’s a typical movie trope: Business leader (or mob boss… it’s usually a mob boss) wants to bring their child into the family business, ignoring the fact that this (typically spoiled) child has little to no experience with the day-to-day operations. Drama ensues, the business collapses, and the danger of nepotism rears its head.

Two men sitting next to each other. One man says, "Nepotism. Alright."

We get it: Family is family. But there are some serious questions you need to ask yourself before you decide to bring your family or close friends into the business:

  • Are you hiring them because they’re the best person for the position or because they need a job?
  • Do they have the proper qualifications and experience for the role?
  • How will the rest of your team feel about you hiring this person?

The last question is especially important — even if your family member is a good candidate for the position, there could be perceived nepotism amongst the rest of your staff. You’ll eventually need to have some candid conversations with your team to avoid drama and unrest.

Pro: They’re invested in your success.

Even before you considered hiring them, your family members were rooting for you (and still are!). Because we want to see the people we love do well in whatever capacity they choose.

So, when you bring your biggest supporters onto your team, they’re going to bring a greater level of enthusiasm and determination than you might see in your average new hire. And they’ve probably watched you go through all the hardships of building your business, so they’ll have a better understanding of the core values and mission statement that serve as the foundation of your business.

Con: Working together could change your relationship.

This one is more of a personal con, but think about it: Running a business is stressful. And when you bring a family member into the mix, your hectic days will start to feel like those long hours preparing Thanksgiving dinner for your entire extended family. Think about those kitchen clashes and potential fires — but now it’s happening once a week instead of once a year.

And because you already have a personal relationship, you and your family members may let your guard down enough to let your tempers flare — creating a negative environment for your entire team. Plus, in a worst-case scenario where your family member isn’t meeting expectations and certain standards in your business, can you fire them without ruining your relationship?

If you’re serious about hiring your family and close friends, don’t let these cons deter you. Just be sure to set up clear expectations and have conversations with your team. You want to be transparent about your decisions, especially as these hires have a greater chance of affecting the wider success of your business — for better or worse.

Legal and tax considerations

If you’ve decided to move forward with hiring your family members, great! But we want to make sure you don’t get into any legal trouble — so, let’s talk tax.

Employee vs. independent contractor?

Some small businesses will hire their family members as independent contractors to avoid paying payroll taxes. But (and this is a huge “but”) you can’t just treat your family members like employees if they’re classified as independent contractors. If you do, your business could face big fines for violating state laws and IRS regulations.

A woman raising her hands above her head. Money flies out of her hands.

There are three major control factors the IRS uses to distinguish between employees and independent contractors:

  1. Behavioral. If you dictate where, when, and/or how a person works, they’re considered an employee. They can also be considered an employee if you provide extensive training or detailed instructions. 
  2. Financial. Contractors are typically in charge of their own equipment (like a laptop) and send invoices for payment. If you’re paying someone regularly or providing them equipment to work, they’re an employee.
  3. Type of relationship. If you’re providing benefits (like healthcare or sick days) to someone or expecting them to provide work that is key to your business’ operations, they’re considered an employee.

You’ll also need to consult your state’s laws on employee versus contractor classifications — for example, California’s bill on employment status is even more detailed than the IRS’s.

Hiring your spouse.

We get it — your spouse is the most amazing person in the world and would be such an asset to your business. No need to brag! But then there’s the question of how to properly compensate your spouse when they become your employee:

Paying your spouse a wage.

According to the IRS, “a spouse is considered an employee if… the first spouse substantially controls the business in terms of management decisions and the second spouse is under the direction and control of the first spouse.” Meaning, if you are planning to work under the typical employer/employee relationship, you’ll pay your spouse a wage, and they’ll be subject to income tax and FICA (Social Security and Medicare) withholding.

But, in most states, if you have a sole proprietorship, you technically don’t have to pay your spouse. Instead, if you provide tax-free benefits like healthcare, you can avoid payroll taxes, tax returns, and W-2 filings. (Note: This doesn’t apply if you own an LLC or corporation.)

When you and your spouse own a business together.

You know that saying, “good things come in pairs”? The same could be said about your business!

Maybe you and your spouse are partners in life and business — if you both have equal say in its operation, you can file your taxes as a general partnership (assuming neither of you is on the payroll).

However, failing to properly file taxes as a partnership can sometimes lead to only one spouse receiving credit for Social Security and Medicare. To avoid that scenario, a married couple who files a joint tax return can apply for an election called the “qualified joint venture.” As long as you and your spouse are the only owners and participate in the business equally, you can avoid filing partnership returns and still receive Social Security and Medicare coverage — for both of you.

Hiring your kids.

Hiring your kids to work in your business isn’t like paying them to mow the lawn or pick up the dog poop. There are several legal requirements you’ll need to take into consideration — otherwise, your business could face some hefty penalties.

First and most importantly, check your state’s laws about the age restriction for hiring minors. Most states allow minors to start working at age 16, though others allow children aged 14 and older (barring certain industries).

Also, you probably don’t want to risk paying your kids under the table to avoid taxes (remember those penalties we mentioned?). For unincorporated businesses, income tax will be withheld from their wages — but if they’re under 18, their wages won’t be subject to FICA. And if they’re under 21, they won’t have to worry about federal unemployment tax.

Bringing your friends and family into your business has the potential to make you stronger — you just want to make sure you’re fully prepared for the changes ahead.

Share it!
Sign up for our newsletter
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
Article

What Your SMB Needs to Know Before Hiring Family Members

August 23, 2022

Jump to a section
Share it!
Sign up for our newsletter
You're all signed up! Look out for the next edition of The Manual Weekly coming Wednesday am!
Oops! Something went wrong while submitting the form.

Good help can be hard to find. Thankfully, you’ve got a source of people who will always have your back: family.

Maybe you want to introduce your spouse or your kids to the day-to-day of your small family business. Or maybe your employees are persuading their own family members to come and work for you. (We’re big fans of that here at Trainual — we have five pairs of siblings on our team, including our own CEO and CMO duo, the Ronzio brothers!)

In whatever case, it can be a good idea to bring your family into your business.

Because when it comes to family or close friends, they’ll support you through thick and thin. They’ll work hard to make sure your business is a success. And because you know them so well, you’ll already have one of the most important traits of a good employee-employer relationship — trust.

But hiring family can be a bit more complicated than you might think. Whether you dream of building a “Succession”-style empire or running a smaller family business that looks like something straight out of “Bob’s Burgers,” there are some considerations you’ll need to take into account before you start onboarding your family members.

A close up on a serious man saying, "Family."

The pros and cons of hiring family members

Like with any business decision, there are good and bad sides to the choice of hiring family.

Pro: A truncated hiring process.

Typically, when you hire someone, you’re going through a long and involved hiring process. Once you’ve sorted through stacks of applications and cover letters, you’re interviewing with multiple different candidates. And in those interviews, not only are you figuring out whether your candidate has the skills and experience to handle this new role, but you’re also trying to determine if their personality will mesh well with the rest of your team and your company’s culture. Plus, there’s all the extra stuff that comes with hiring, like background checks and contract negotiations.

On the other hand, you might have a candidate waiting for you on a silver platter. If you have a family member in consideration for one of your team’s roles, you already have a good idea of their strengths and weaknesses in the industry. Plus, you know them, so when the question about fitting into your squad comes up, you’ll already have a “yes” or “no” in mind.

Con: Is this nepotism?

It’s a typical movie trope: Business leader (or mob boss… it’s usually a mob boss) wants to bring their child into the family business, ignoring the fact that this (typically spoiled) child has little to no experience with the day-to-day operations. Drama ensues, the business collapses, and the danger of nepotism rears its head.

Two men sitting next to each other. One man says, "Nepotism. Alright."

We get it: Family is family. But there are some serious questions you need to ask yourself before you decide to bring your family or close friends into the business:

  • Are you hiring them because they’re the best person for the position or because they need a job?
  • Do they have the proper qualifications and experience for the role?
  • How will the rest of your team feel about you hiring this person?

The last question is especially important — even if your family member is a good candidate for the position, there could be perceived nepotism amongst the rest of your staff. You’ll eventually need to have some candid conversations with your team to avoid drama and unrest.

Pro: They’re invested in your success.

Even before you considered hiring them, your family members were rooting for you (and still are!). Because we want to see the people we love do well in whatever capacity they choose.

So, when you bring your biggest supporters onto your team, they’re going to bring a greater level of enthusiasm and determination than you might see in your average new hire. And they’ve probably watched you go through all the hardships of building your business, so they’ll have a better understanding of the core values and mission statement that serve as the foundation of your business.

Con: Working together could change your relationship.

This one is more of a personal con, but think about it: Running a business is stressful. And when you bring a family member into the mix, your hectic days will start to feel like those long hours preparing Thanksgiving dinner for your entire extended family. Think about those kitchen clashes and potential fires — but now it’s happening once a week instead of once a year.

And because you already have a personal relationship, you and your family members may let your guard down enough to let your tempers flare — creating a negative environment for your entire team. Plus, in a worst-case scenario where your family member isn’t meeting expectations and certain standards in your business, can you fire them without ruining your relationship?

If you’re serious about hiring your family and close friends, don’t let these cons deter you. Just be sure to set up clear expectations and have conversations with your team. You want to be transparent about your decisions, especially as these hires have a greater chance of affecting the wider success of your business — for better or worse.

Legal and tax considerations

If you’ve decided to move forward with hiring your family members, great! But we want to make sure you don’t get into any legal trouble — so, let’s talk tax.

Employee vs. independent contractor?

Some small businesses will hire their family members as independent contractors to avoid paying payroll taxes. But (and this is a huge “but”) you can’t just treat your family members like employees if they’re classified as independent contractors. If you do, your business could face big fines for violating state laws and IRS regulations.

A woman raising her hands above her head. Money flies out of her hands.

There are three major control factors the IRS uses to distinguish between employees and independent contractors:

  1. Behavioral. If you dictate where, when, and/or how a person works, they’re considered an employee. They can also be considered an employee if you provide extensive training or detailed instructions. 
  2. Financial. Contractors are typically in charge of their own equipment (like a laptop) and send invoices for payment. If you’re paying someone regularly or providing them equipment to work, they’re an employee.
  3. Type of relationship. If you’re providing benefits (like healthcare or sick days) to someone or expecting them to provide work that is key to your business’ operations, they’re considered an employee.

You’ll also need to consult your state’s laws on employee versus contractor classifications — for example, California’s bill on employment status is even more detailed than the IRS’s.

Hiring your spouse.

We get it — your spouse is the most amazing person in the world and would be such an asset to your business. No need to brag! But then there’s the question of how to properly compensate your spouse when they become your employee:

Paying your spouse a wage.

According to the IRS, “a spouse is considered an employee if… the first spouse substantially controls the business in terms of management decisions and the second spouse is under the direction and control of the first spouse.” Meaning, if you are planning to work under the typical employer/employee relationship, you’ll pay your spouse a wage, and they’ll be subject to income tax and FICA (Social Security and Medicare) withholding.

But, in most states, if you have a sole proprietorship, you technically don’t have to pay your spouse. Instead, if you provide tax-free benefits like healthcare, you can avoid payroll taxes, tax returns, and W-2 filings. (Note: This doesn’t apply if you own an LLC or corporation.)

When you and your spouse own a business together.

You know that saying, “good things come in pairs”? The same could be said about your business!

Maybe you and your spouse are partners in life and business — if you both have equal say in its operation, you can file your taxes as a general partnership (assuming neither of you is on the payroll).

However, failing to properly file taxes as a partnership can sometimes lead to only one spouse receiving credit for Social Security and Medicare. To avoid that scenario, a married couple who files a joint tax return can apply for an election called the “qualified joint venture.” As long as you and your spouse are the only owners and participate in the business equally, you can avoid filing partnership returns and still receive Social Security and Medicare coverage — for both of you.

Hiring your kids.

Hiring your kids to work in your business isn’t like paying them to mow the lawn or pick up the dog poop. There are several legal requirements you’ll need to take into consideration — otherwise, your business could face some hefty penalties.

First and most importantly, check your state’s laws about the age restriction for hiring minors. Most states allow minors to start working at age 16, though others allow children aged 14 and older (barring certain industries).

Also, you probably don’t want to risk paying your kids under the table to avoid taxes (remember those penalties we mentioned?). For unincorporated businesses, income tax will be withheld from their wages — but if they’re under 18, their wages won’t be subject to FICA. And if they’re under 21, they won’t have to worry about federal unemployment tax.

Bringing your friends and family into your business has the potential to make you stronger — you just want to make sure you’re fully prepared for the changes ahead.

Article

What Your SMB Needs to Know Before Hiring Family Members

August 23, 2022

S
E

Organize the chaos
of your small business

No items found.
No items found.