What You Need to Know

Hiring family members to work in your small business, especially when it is growing quickly, may seem like a perfect solution. However, there are some legal, tax, and operational issues to consider. Additionally, even though hiring family members is generally legal, it may not always be advisable. If not handled properly, it can lead to claims of nepotism—showing favoritism to a relative by giving them key jobs or higher salaries—and employee disengagement.

Read further for what you need to know about hiring family members.

Legal & Tax Issues

As with hiring any other employee, there are legal implications you must consider when hiring family members. Make sure you’re hiring correctly and setting up policies for successful growth.

Employee Misclassification

It may be tempting to hire family members for vague or ill-defined roles, but you need to be certain that you’re classifying them correctly. One of the best ways to get into trouble with government agencies is to misclassify employees as contractors.

Many small businesses use independent contractors for various projects. However, be sure that you’re not crossing a line and turning an independent contractor into an employee. Make sure the scope of work is clearly stated in the contract and that there is no employer-employee relationship.

It is also necessary to ensure that the work is performed in accordance with independent contractor standards. Even if your contractor is a family member, you cannot direct them on when or how to do the work, or you risk misclassification fines and penalties. Independent contractors are best suited for projects outside the scope of your daily business needs and may not be the best idea for family members.

Employment Law & Pay

First, don’t hire your children or other family members if they are under the legal working age—these aren’t chores around the house. Hiring minors comes with its own challenges and legal considerations. The exact age a child can be employed without restriction varies by state but is generally around 16 years old. Some states allow children over 14 to work minimal hours, although not in certain industries.

Second, avoid paying your family members under the table with cash. Not only does that create potential tax problems for both of you—including limiting their ability to build their Social Security base—but it can also create a bad situation if they were to get injured on the job. Since they’re being paid under the table and not officially as an employee, your workers’ compensation insurance wouldn’t cover them. Any family member you hire needs to be paid just like any other employee.

Finally, keep accurate time records for your family members. Just because they’re your family doesn’t mean you can avoid paying them overtime or ask them to work “off the clock.” Not paying employees correctly is illegal, regardless of their familial status.

Tax Implications

If you’re hiring your spouse, child, or parent, it could also alter your tax responsibilities. It’s best to consult with an adviser regarding complex tax rules, but here is a general guide to help you determine what taxes must be withheld in certain situations.

Operational Considerations

You may also have some operational issues to consider when hiring family members, primarily around ensuring that every employee is treated equally.

Here’s the bottom line: Other employees will assume your family members get special treatment, so you need to go out of your way to show that’s not the case. From interview and performance reviews to salary increases and disciplinary actions, your family members have to be treated the same as every other employee. In fact, to overcome the appearance of favoritism, you may even need to be stricter with your family.

Consider the following example:

You own several convenience stores and hire your spouse part time to open one of those stores four days per week. In this role, they have to arrive an hour before the store opens to make sure they clean up anything left over from the night before, account for all the money in each register, prepare for any shipments that might be arriving that day, and get the store ready for other employees and customers. Unfortunately, in their first month, your spouse is late for half of their shifts and doesn’t have enough time to complete all of their tasks before the store opens. This creates a snowball effect of headaches for the employee who comes into relieve your spouse later in the day.

If this individual were not your spouse, how many late arrivals would you give them before writing them up and formally disciplining them? If we’re being honest, less than a handful most likely. If you’re not writing your spouse up after the second or third late arrival, you’re playing favorites. Your business will hurt because of it, and your employees will become less engaged, less productive, and more likely to find another job.

Favoritism in and of itself is generally not illegal, although at the extreme, it can become illegal if your actions discriminate against other employees of protected classes. Favoritism could also violate your company policies, such as an anti-nepotism policy, which we discuss below.

Anti-nepotism Policy

Your company’s reputation is important and needs to be protected. Many owners like the feeling of a family business, but that can turn some potential employees away as they may feel non-favored or out of the loop.

We recommend having a good anti-nepotism policy, which can help avoid conflicts of interest and allay employee concerns by laying out straightforward guidelines for how to handle familial relationships in the workplace. Such a policy seeks to ensure family members are not directly involved in hiring, evaluating, disciplining, or promoting one another. It should also establish, as discussed earlier, that family members will be held to the same standards and required to follow the same processes and procedures as non-family members.

Some anti-nepotism policies go even further and simply prohibit the hiring of close relatives of any employee. This completely eliminates any issues that may arise from hiring family members.

Pros & Cons of Hiring Family Members

Family members are often hired by small business owners because it’s easy. Your family members, especially your spouse, may intimately know your challenges and be willing to help. Many times, family members will pitch in to help with bookkeeping duties and other behind-the-scenes tasks that ease the administrative burden on you. Just make sure your family member understands the work you need them to do and has the skills required.

Your family members also have a vested interest in your business succeeding so you can trust them to do accurate work. With any other employee, they’ll need to gain your trust over time. You already trust your family members so you can have them work on confidential matters that you may not have other employees handle.

However, hiring family members can lead to production and morale issues, and the larger your business, the more likely it is that problems will arise. Here’s a breakdown of the biggest advantages and disadvantages.

Bottom Line

If you decide to hire a family member, keep it professional so you can separate your work and family relationships. While there are many reasons to hire the most qualified candidates for a job, sometimes a relative can be a good fit, even temporarily. Ultimately, if you hire a family member, do it right by following the law and treating your relative as you would any other employee. Even though hiring a family member might seem like the best and easiest choice, carefully consider the impact it will have on your business.

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