Anyone who has had family members on their staff likely knows working with relatives comes with plenty of pros and cons—for both your relationships and your payroll taxes. We talked to Sam Pelner, EA and vice president of Padgett Lakeville, who has worked with his father, Steve, for years. Here’s his advice for making it work when working with family:
Keep good records
Remember that family members still need to be treated like regular employees—even if they’re under 18. “I started working for my dad when I was in grade school, doing janitorial services,” Sam says. “If you’re hiring kids, like my dad did, you have to make sure you’re documenting how often they’re working and what they’re doing.”
Even if you’re working with siblings, a spouse, or other relatives, it’s important to have those records to protect your business from audits, Sam warns. “If an audit comes up, it’s important to have that documentation in place to prove that your family members are doing actual work and aren’t just on your payroll for tax cuts.”
Know the benefits
Even when paying your relatives like regular employees, there are some benefits available. If you’re hiring your children as a sole proprietorship or a partnership where both partners are parents, “you can pay your kids under 18 without being subject to social security and Medicare taxes,” Sam says. Up to age 21, your child is also not subject to Federal Unemployment Tax Act (FUTA) taxes.
“And when you’re paying your kids, they’re subject to the same standard deductions that everyone else is,” Sam reminds business owners, so think about how you can make the most of your child’s income. “For example, when my dad was paying us as kids, he would put some of our pay into a Roth IRA to help build up some savings for us.”
The rules are different f your business is a corporation, estate, or partnership with including someone who is not the child’s parent, or for parents employed by their children, so check out the IRS.gov website and talk to your tax advisor about the regulations for your business.
Focus on the trust
Having family members as employees can be a challenge, not just for payroll but also for your personal relationships. It can be harder to be objective when working with relatives and people you’re close to. “One of the biggest challenges can be differences of opinion, especially when it comes to a partnership situation,” Sam says. “When a lot of people all have strong opinions, it can clash.”
“On the flipside,” he says, working with a family member can also provide a mentor and a friend. “Having someone that you can trust and know who to go to makes a huge difference, rather than having to figure it out on your own.”
Even if you don’t have family working with you, having a trusted advisor is key. If you need a partner you can rely on, Padgett’s nationwide network of EAs and CPAs are here to help! Find a location near you today.
Meet Sam Pelner, Enrolled Agent and Vice President of Padgett Lakeville
Sam joined Padgett in 2020 after 6 years in commercial real estate accounting. His passion is assisting small business owners succeed by helping them navigate the complexities of tax and compliance. He has earned a BS in accounting from Saint John’s University and his Enrolled Agents certification. His hobbies include running, golf, and spending time with family and friends.