Hiring family members makes sense on an intuitive level. It saves you the time and effort of recruiting strangers, and it gives you the chance to help one of your relations advance their career. Win-win, right?
While turning your therapy practice into a family business could come with benefits, it also introduces new complexities—namely child labor law (if you’re hiring younger relatives) and certain aspects of payroll (mainly if you’re hiring your spouse).
Here’s everything you need to know so you can hire family members the right way.
Is hiring a family member nepotism?
The Oxford English Dictionary says nepotism is the “unfair preferment of or favoritism shown to friends, protégés, or others within a person's sphere of influence.”
Maybe that definition has you picturing an exposé on the nightly news: “Local Therapist Accused of Nepotism.” Is that the kind of publicity you can expect if you hire family members?
Not likely. Hiring family is a fairly common practice among small business owners. You’ve probably frequented a family-run business in the past: A convenience store where parents and their adult kids work the register, for instance. In fact, the term “mom ‘n pop” shop alludes directly to this practice.
It’s important to keep in mind the scale you’re working at. If you ran a telehealth platform with millions of dollars of funding, and gave all the top positions at your company to blood relatives, anyone accusing you of nepotism would be justified in doing so.
But you run a small therapy practice; in fact, you may currently be the only person working there. Recruiting your niece to run your social media account, going into business with your spouse who is also a therapist, or hiring your brother-in-law to design your website: None of these are likely to result in accusations of nepotism.
It also helps if the family members you’re hiring are qualified. It’s one thing to hire a family member who has the background and experience to do the job well, and another to hire them simply because they’re related to you, taking away an employment opportunity from a non-family member who may be qualified.
In that case, not only are you being unfair, but you’re making an unwise business decision by hiring someone who won’t do the job well. (And whom you may be forced to fire—making your next big family Thanksgiving awkward.)
Do you get a tax deduction for hiring family members?
Gross wages or fees paid to employees or contractors in the course of doing business are tax deductible, providing they’re ordinary and necessary. It’s no different when you pay a family member.
However, you may be able to make smart tax moves by hiring your spouse. More on that below.
The pros and cons of hiring family members to work for your therapy practice
Hiring family members comes with benefits and drawbacks. Particulars vary: Hiring your spouse to work for you may mean higher stakes—in terms of the potential for complications in your personal life—than hiring a distant cousin.
But generally speaking, here’s what to watch out for.
Benefits of hiring family members:
- Faster, easier hiring. No need to draft a job description for public consumption, post it on job boards, review resumes, and book interviews. Hiring a family member is typically more straightforward (and less expensive, if you’d otherwise hire a recruiter) than vetting members of the public at large.
- Better character insight. It can be hard to get a sense of someone’s personality from a job interview and resumé alone. There’s always the possibility a seemingly-perfect candidate will be totally unbearable to work with. When you hire a family member, you already have a sense of how you’ll jibe on a personal level.
- Potential tax savings. Some of the extra expenses that come with having an employee on the payroll—FICA in particular—become a non-issue when you hire your spouse.
- Family pricing. If you hire a family member as a contractor, they may offer you special pricing because you’re family. (Learn more about hiring independent contractors.)
- Trust. It’s hard to quantify or put a dollar value on family bonds and the trust between family members. But, of the many reasons small business owners often hire family members, this is a major one. You may simply be better able to trust a family member to do their job well and handle sensitive tasks for your business than you would a stranger.
Drawbacks to hiring family members:
- Mixing business and personal life. Working with family is bound to create crossover between your professional and personal lives. If you’d rather keep work and home cleanly separated, hiring a family member may not be the best way to go.
- Bias. You may find it all too easy to overlook someone’s shortcomings as an employee when you see them as a family member to whom you’re personally responsible. Poor performance you’d find intolerable in an employee may be a mild irritant or an amusing quirk in a family member—even if it costs your practice money.
- Lack of diversity. Hiring a family member with a similar background to yourself means you’re forfeiting the opportunity to bring onboard someone with a different perspective. Having team members from different backgrounds provides a voice in the room to challenge your assumptions and introduce points of view you may never have considered on your own.
Should you hire your spouse to work at your therapy practice?
Almost any family member you hire will be treated by state and federal law as a regular employee. The fact that you’re related doesn’t change anything for legal or tax purposes.
With one exception: Hiring your spouse.
When your spouse is your employee, you can both save a substantial amount on taxes—provided you play your cards right.
Here’s what you need to do.
1. Make sure your spouse is a bona fide employee
If the IRS questions any tax benefits you enjoy because your spouse is an employee, they’ll typically question whether your spouse is a bona fide employee at all.
Having a written and signed employer-employee agreement is not enough; in fact, according to the Bradford Tax Institute, it can actually create more problems than it solves.
Most important is making sure your spouse qualifies as an employee in the eyes of the law. To do that, they must:
- Do real work. The best way to prove this is by tracking their hours and maintaining a list of duties they perform at your therapy practice.
- Do not co-own the business. If your spouse owns any business assets, they may qualify as a partner in a partnership—in which case your relationship is that of partner and partner, not employer and employee.
- Work under your direction. In meeting notes, emails, and other written documents, it should be clear that you’re the one making management decisions, not your spouse.
- Get paid. In most states, you are not required to pay your spouse the minimum wage. In fact, it’s usually more beneficial for you if you pay them solely in fringe benefits, like medical coverage, and forego cash altogether. But any reimbursable expenses your spouse-employee incurs should be charged to their personal checking account, not your business account.
- Earn reasonable compensation. Even if your spouse earns only in the form of fringe benefits, their compensation needs to be reasonable and not exorbitant. Since your spouse’s earnings are a deductible business expense, the IRS is on the lookout for over-the-top payments.
Finally, you need to make sure you comply with state laws pertaining to employees. These vary. You may need to register your spouse as an employee and withhold workers’ compensation payments.
2. Make sure your practice is a sole prop or a single-member LLC
In order to benefit from spouse-employee tax moves, your practice needs to be either a sole proprietorship or a single member LLC. S corporations, partnerships, or LLCs electing those tax statuses won’t qualify.
3. Instead of cash, pay your spouse tax-free benefits
Remember, in most states, you are not required to pay your spouse minimum wage. It’s usually better not to pay them cash at all.
When you pay your spouse cash as their employer, you have to withhold income tax and FICA deductions. (FICA is 15.3% of the employee’s gross wages; one half of that amount (7.65%) comes from their wages, one half comes from their employer.)
It’s true that your employees’ wages are tax deductible—they lower the overall tax bill for your business. But the tax burden is effectively just passed on to your spouse, who ends up paying taxes on their wages as an employee.
(Thanks to the unlimited marital deduction, you can transfer non-wage funds to your spouse and they don’t need to pay income tax on it.)
Instead, opt to pay your spouse in tax-free fringe benefits. The “tax-free” part refers to the fact your spouse doesn’t need to pay income tax on these forms of reimbursement. At the same time, the cost is tax deductible for your business, lowering your overall tax bill.
4. Explore tax-free benefits as compensation
There are a number of tax-free fringe benefits to consider when compensating your spouse:
- A health reimbursement arrangement (105-HRA), in which you reimburse the cost of medical expenses, typically has potential for the biggest tax writeoff. Learn how 105-HRAs work.
- Education. Any reimbursement for job-related education your employee undertakes is tax deductible.
- Life insurance. You may provide up to $50,000 in group term life insurance tax-free.
- Working condition fringe benefits. The cost of equipment necessary for your spouse to do their job—like a work phone or computer—is tax deductible.
- De minimis fringe benefits. Small expenses like occasional meals or entertainment for employees are tax deductible.
Since the particulars of hiring employees varies state by state, and there’s the potential to attract extra IRS scrutiny when hiring your spouse, consult with an accountant before taking any major steps.
Hiring family members who are minors to work at your therapy practice
If you have a younger relative who is considering going to school to become a therapist, hiring them to work part time at your practice is a great way to show them what day-to-day operations look like.
State laws and hiring minors
Some of the labor laws you need to follow for minors are determined at the state level. Get in touch with your state’s labor office to learn about them.
Some states require you have a work permit, age certificate, or combination of the two for your minor employee before they can start working for you. Here’s a state-by-state guide.
Typically, the employee requests a form from their state after you’ve hired them but before they begin work; their parent or guardian fills out and signs the form, and sends it back to the state for approval. After that, they receive a certificate.
Some certificates have expiry dates, after which they need to be renewed. It’s your employee’s responsibility to get a certificate and your responsibility to make sure they have one.
Federal laws and hiring minors
Labor laws for hiring minors are determined at the federal level by the Fair Labor Standards Act (FLSA).
The federal minimum employment age is 14 years, and anyone under the age of 18 years is considered a minor. If you hire someone who is 14, 15, 16, or 17 years old, there are federal laws you need to follow. These mostly pertain to when and for how long your employee can work, as well as their federal minimum wage.
(Other laws pertain to what kind of work they can do, preventing minors from doing potentially hazardous jobs. The table below only notes the restrictions relevant to a typical therapy practice.)
Best practices for hiring family members to work for your therapy practice
Whether you’re hiring your spouse or your second cousin twice removed, there are a few best practices you should try to adhere to when hiring family.
- Create a job description. Even if you’re not publicly advertising a position at your therapy practice, you should create a thorough job description. Include a name and description for the role, as well as duties, expectations, compensation, and benefits. This gives you and your family member a clear foundation to work from, and helps avoid disputes later on.
- Conduct an interview. When you’re hiring somebody you already know well, it may be tempting to simply have an informal chat and then hire them. But that approach makes it easy to miss important details. For instance: How long do they anticipate working for you? What are their career goals? What types of conditions do they work under best? Being upfront about that now saves you uncovering these details on the job, and makes sure the working arrangement is a good fit for the both of you.
- Be upfront about the fact you’re related. If the topic comes up in conversation with clients, other therapists, or anyone who wants to know, don’t dissemble. Hiring a family member doesn’t make you a nepotist, and there’s nothing to hide. But skating around the fact can make the whole matter more awkward than it really is.
Many self-employed therapists hire family members part-time to work as their administrative assistants. Learn more about hiring an administrative assistant for your therapy practice.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult their own attorney, business advisor, or tax advisor with respect to matters referenced in this post.
Bryce Warnes is a West Coast writer specializing in small business finances.