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Should You Hire Family Members to Work in Your Startup?
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January 26, 2023
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Father and son standing together smiling

Startups often cannot afford to hire employees—full- or part-time—but need help to get their small business off the ground. One solution new entrepreneurs often turn to is hiring family members. 

There are several advantages to hiring members of your family to work in your startup:

  • Known quality: You know the person, their work ethic, past work history, and personality. You’re aware of their strengths and weaknesses and how you’ll get along with them. Plus, you don’t have to do a background check or worry about employee fraud. 
  • Build a legacy: Hiring family members can be the beginning of a lasting family business. Family members often are highly motivated and take more pride in their jobs than outsiders. If they think the business will be theirs someday, they’ll be especially invested in the company’s success.
  • Attitude: Family members are invested in your success and will likely work harder to help your business grow. They’re also likely to be familiar with your vision and ultimate goals. 
  • Cost savings: Family members may be willing to work for lower pay than other employees—especially when your business is just starting out. But be careful not to take advantage of this and pay them a fair and equitable wage as soon as you can afford it.

However, it's important to honestly assess the risks of hiring family members.

  • Entitlement: Even a family member with a stellar employment record may take advantage of your relationship.
  • Discipline issues: How easy will it be to discipline the family member you are considering hiring? What will you do if they don’t live up to your expectations? Will you feel comfortable doing employee reviews of the person? Could you fire them if the situation called for it?
  • Perception of nepotism: If you start out hiring family members, as your business grows, hiring nonfamily members may be more challenging. Whether fairly or not, nonfamily employees often believe that they won't get fair treatment at a family-owned business and that family members will always come first.
  • Authority problems: Family members who treat you with familiarity can undermine your authority with nonfamily employees, causing discipline issues and possibly low morale throughout the company.
  • Gossip: Family members who work in the business may gossip about your personal life with nonfamily employees or may tell your family members things about your business that you'd rather keep private.
  • Unrealistic expectations: If you hire your brother, will your aunt expect the same treatment for your lazy, unskilled cousin? Consider the message that hiring one family member could send to others in your family.

If you decide to hire family members, take these steps to make the process run more smoothly:

  • Write an employee handbook, and have your family member sign an employment agreement just as you would with any employee. Create a job description and make your expectations clear. Make sure your relative understands that the same rules apply to all employees.
  • Hire family members on a trial basis. For example, set a 60- to the 90-day probationary period during which the family member may be let go if your expectations aren't met. (This is a good idea when hiring any employee.)
  • Hire family members only if their skills and experience fit the job. Never hire a family member as a favor. Doing so is the surest way to regret your decision.
  • It’s critical that you and your family members understand that you’re entering into a business relationship. Just as they shouldn’t take advantage of the fact they’re related to you, you shouldn’t take advantage of the family connection. Treat them fairly—judge them by the same standards you apply to all your (current and future) employees.
  • If you’ve hired your spouse or children, keep business discussions at a minimum when you get home. It’s important to separate your personal and business lives. If you’re having a personal disagreement, don’t bring it to work. 

Taxing Matters

There are some tax advantages to hiring family members. 

Hiring your spouse

  • If you hire your spouse, they are considered an employee of your business if you are clearly the boss, responsible for the company's daily operations, and the primary decision maker. While payroll taxes must be paid, they are not subject to FUTA (federal unemployment tax) unless your company is a corporation. If your business is not incorporated, the Internal Revenue Service (IRS) explains more: Election for Married Couples Unincorporated Businesses and Married Couples in Business

Hiring your kids

  • If your child is under 18 and you own a sole proprietorship or a partnership with your spouse (and you are both parents of the child), the child's wages are not subject to Social Security and Medicare taxes.
  • If your child is 18 or older, their wares are subject to Social Security and Medicare taxes. 
  • If your child is under 21, they are not subject to FUTA, but once they turn 21, they are subject to FUTA.
  • If the business is a corporation, a partnership (unless both partners are parents of the child), or an estate (even if it is the estate of the deceased parent of the child), your child’s wages are subject to income tax withholding, and they must pay Social Security and Medicare taxes, and FUTA, regardless of their age.

Hiring your parents

  • If you own a sole proprietorship, per the IRS, your parents’ wages are subject to income tax withholding and paying Social Security taxes and Medicare taxes.
  • However, your parents are not subject to FUTA taxes.
  • If your business is incorporated or a partnership, your parents are subject to income tax withholding and paying Social Security and Medicare taxes and FUTA. 

Read the IRS Guidelines and consult with an accountant to make sure you’re compliant. 

As you can see, there are advantages to hiring a family member, but there are challenges as well. Approach the situation professionally, be honest and open with your family member/s, and you can build a thriving business together.
 

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