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When it comes to hiring family members in your business there are laws. Hiring family in a small business will help you to avoid pitfalls when it comes to employment law questions with regard to tax laws. Some family businesses operate by paying their children, spouse or extended family members “under the table," without regard to what the legal obligations are. That could end up costing you in legal fees for violations, not to mention an IRS tax audit. Here are some of the legalities that you need to know about.
Image Credit: (Benjamin Earwicker)
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FICA and FUTA Taxes May Be Waived
The Federal Income Contributions Act (FICA) is a law passed by Congress that requires employers to pay Social Security as well as Medicare taxes, otherwise known as FICA taxes.
The Federal Unemployment Tax Act (FUTA) requires employers to pay unemployment taxes on behalf of their employees. It’s your responsibility as an employer to withhold these taxes from your employees’ paychecks, because they also have to pay a portion of their income for FICA and FUTA purposes. That may not be necessary when your employees are family members. Some of the exceptions have to do with the age of the family member who works for you.
For example, FICA taxes may be exempt if you pay a salary to your child who is not at least 18 years old. You should consult with your tax attorney to verify what is allowed based on your business structure, and the family member’s relationship to you in age. Tax savings is not only a legal issue, but also a cash flow issue. If you can have more money in your cash reserves because you take advantage of the laws on hiring family in a small business, then your business will be much better off.
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Hiring Under Age Children
Child labor laws in the United States prohibit employers from hiring minor children younger than 14 years old in some states, and 16 years old in others. Those laws may not apply to employers who hire their own children, depending on their business structure. For example, if you’re a sole proprietorship, you may be able to hire your own children, who would otherwise not be employable by outside employers.
Corporations face more stringent rules, so if you’ve organized yourself as a C or S corporation, you may not be exempt from the employment laws in regards to how you treat your children. The same is true of spouses and parents.
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Your state may prohibit you from hiring employees who are family members if you work in a regulated industry. For example, you may not be able to hire a spouse or other family member as a director, if you are also listed as the director of the corporation. It depends on your state regulations and the industry. You should find out what the laws on hiring family for your small business are to avoid any legal problems.
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The best thing to do, is to consult with your attorney about the laws on hiring family in small business, before you take action. Getting your legal ducks in a row from the start can pay dividends.
FPASW.org: Rules for Hiring Family Members
Human Resource Executive Online: The Implications of Hiring Family