Many small business owners consider hiring family members during the summer to help with seasonal tasks or to lighten the workload. Whether it’s a spouse, child, or other relative, there are important bookkeeping and tax considerations you need to understand before putting them on the payroll.
Key Considerations:
Legitimate Work and Reasonable Pay:
Any family member you hire must be doing actual work for your business. The work must be clearly defined, necessary to your operations, and compensated at a reasonable market rate. This protects you in the event of an audit and allows you to deduct wages properly as a business expense.
Proper Recordkeeping:
Maintain detailed records just as you would with any employee:
- Job descriptions
- Hours worked
- Tasks performed
- Payroll records
- Method of payment
Treat it like a formal employment relationship.
Tax Treatment by Relationship Type:
- Your Child (Under 18):
If you’re a sole proprietor or an LLC taxed as a sole proprietorship, wages paid to your child under 18 are not subject to Social Security, Medicare, or FUTA taxes. This rule only applies to your own biological or adopted children—not nieces, nephews, or grandchildren. - Your Spouse:
Wages paid to a spouse are subject to Social Security and Medicare taxes, but not FUTA tax. - Other Relatives (siblings, parents, etc.):
These are treated like standard employees. All regular payroll tax rules apply.
Payroll Requirements Still Apply:
Even if you’re hiring family, you’re still responsible for:
- Registering as an employer (if not already done)
- Filing Form W-2
- Withholding appropriate taxes (unless exempt)
- Filing quarterly payroll tax reports (Form 941)
- Keeping copies of tax filings and pay records
Common Mistakes to Avoid
- Paying Without Reporting:
All payments must be reported to the IRS. Avoid paying in cash without documentation. - No Payroll System in Place:
Even if it’s a short-term summer hire, set up proper payroll—manually or through software. - Failing to Comply With Child Labor Laws:
If the employee is under 18, you must comply with both federal and state youth employment laws. Restrictions vary by age and state.
Tools You Might Use
- IRS Publication 15 (Circular E): Employer tax requirements
- Gusto / QuickBooks Payroll: Tools to automate tax withholdings and filings
- Department of Labor YouthRules.gov: Guidelines for hiring minors
- Form SS-4: If you need an EIN to run payroll
Consider Implementing This Strategy
If you’re short-staffed during summer or need help with routine administrative work, hiring a family member can be a smart move. It’s also a way to shift income within the household legally. Ensure the setup is legitimate and well-documented.
FAQ
- Q1: Can I deduct wages paid to my child as a business expense?
- A1: Yes, as long as the child is doing legitimate work and paid a reasonable wage, the expense is deductible.
- Q2: Do I need to withhold payroll taxes for my child?
- A2: If your child is under 18 and you are a sole proprietor or single-member LLC taxed as such, you do not need to withhold Social Security, Medicare, or FUTA taxes.
- Q3: Can I hire my spouse without setting up payroll?
- A3: No. You must run payroll and withhold Social Security and Medicare taxes. FUTA may not apply, but standard payroll obligations do.
- Q4: Are there age restrictions when hiring minors?
- A4: Yes. Federal and state laws restrict the type of work and number of hours minors can work. Always check current labor laws.
- Q5: What if I pay them cash just for the summer?
- A5: All wages, regardless of how they’re paid, must be reported and documented properly. Paying cash does not eliminate payroll obligations.
Hiring family members during the summer can provide support when you need it most—but it must be handled correctly. From a bookkeeping and tax standpoint, the rules are clear: document everything, follow wage and hour laws, and make sure you meet payroll requirements. When done properly, it’s a legal and effective way to get help while keeping your business organized.