Tax implications

One important consideration in hiring relatives is whether or not to pay a salary and, if so, how much to pay.

If you are paying a salary, you must make Social Security and Medicare tax deductions from each paycheck, and report the wages and deduction amounts quarterly on a Form 941.

If you are not paying a salary, and the person is merely “helping out,” you’re depriving him or her of the ability to count this time towards a retirement or other benefit, such as disability, from Social Security in the future.

Another consideration: A relative already collecting Social Security may not want a salary because it might reduce the Social Security benefit if earned income (wages) exceeds $30,000. In this case, track the wages to be sure he or she doesn’t exceed the maximum.

How much should you pay? If you have a job description and specific hours, pay the relative what you would pay anyone else taking the job. In most cases it’s best to pay an appropriate amount and deduct for Social Security and Medicare from both the employee and the practice.

If you pay less, you are not appropriately accounting for your business expenses.