What smart owners know about hiring family

Nerre: Welcome to Building More than Business. I'm Nerre Shuriah, National Director of Wealth Content here at First Citizens Wealth. My background is as a tax attorney, and I'm also a business exit consultant. Today, we're tackling a topic that hits close to home—literally for us. Should you employ your family members? Joining me is my colleague Richard Houston, and I'm excited that he's here.

Richard, can you introduce yourself a little bit more?

Richard: Absolutely. And thanks for having me, Nerre. I'm a Senior Wealth Strategist here at First Citizens Wealth and a certified financial planner, certified exit planning advisor and accredited estate planner. Glad to be here.

Nerre: That's great. Lots of credentials there, so you're going to be a valuable help for us with this topic. I know you've worked with a lot of family businesses—and they've hired lots of family members—so you're going to have a pretty good perspective on this. And speaking of perspective, let me set the tone with this topic.

As our listeners know, we put out the First Citizens Beyond Wealth report last November, and we did one in particular for business owners. And that's our annual report that lets us figure out what's going on in the minds of business owners and help them identify the issues that navigate the intersection between business and personal wealth.

In that report, we surveyed over 500 business owners, and we found out that 26% of experienced owners report their business is family-owned—compared to 9% of first-time owners. So that's a big difference. And from what I see with that stat, that means the more experienced you are as a business owner, the more likely you are to start a business with family members or hire them into your business.

In case anybody wants to read through the report, we've included it in our show notes. So tell me what you think, Richard. Could you work with your family members?

Richard: That's a good question. And you know, while I would certainly enjoy certain aspects of working with my family, I also know that it would not come without its challenges. You know, there's a saying, family businesses are kind of like team sports, right? You win together and you lose together. And I think that says a lot about some of the ups and downs you go through with a family business, which is probably a good segue just to start with, you know, what are the benefits and pros of employing family members?

You know, as we think about those, I think one of the big ones that stands out to me is trust and loyalty. You know, family often brings a level of reliability and commitment that's hard to find elsewhere. Another one would be shared values and vision. I think family businesses often have a special element that sets them apart, which is built on those values and common vision.

And I think when families come together to work toward a mutual goal, there's often that sense of unity and purpose.

And I think, you know, that's a big reason that parents often want to have their kids take over the company one day. You know, they've learned that business at an early age. It often gives parents a sense of confidence because of those instilled values that they've had growing up versus the challenge of going out to find someone else to take it over.

Nerre: So what are some traits that you've identified in working with family businesses that are common to the most successful ones?

Richard: Yeah, it's a good question. You know, the most successful ones that I've seen tend to have three traits in common. One is adaptability. You know, they embrace challenges that come their way, and they're open to change to meet them. They recognize that just because something has worked doesn't guarantee it's going to work in the future, right?

The second would be teamwork. You know, effective family businesses know that functioning well requires constant effort. And you know, they're not afraid to have difficult conversations with different family members and recognize the importance of doing all these things together as a family.

And the last one would be just curiosity. You know, a lot of these family leaders ask great questions rather than assume that they have all the answers. There's a statistic from the Beyond Wealth report that 65% of family businesses are owned by the first generation, while 14% are second generation and 6% are third generation or more. I think this stat shows the potential for long-term legacy when family is involved and why planning for a succession is so important.

Nerre: Long-term legacy is important, but there is some tax benefits that you can achieve today by hiring your family members. The first is wages paid to children under 18. And when your entity is an LLC, a partnership or a sole proprietorship—and it's owned by the parents of that child—you don't have to do withholding in their payroll taxes.

So payroll taxes are things like Social Security, Medicare or unemployment taxes. And that can be a headache for some business owners. Avoiding that necessity for hiring a child is a good perk. I also want to point out that it's important to follow the labor laws, both federal and state, when hiring a child. There are some roles that children can only do at certain ages, and there may be hazardous jobs that all minors are prohibited from doing.

You want to make sure that they're doing appropriate work for their age, and they actually have to work. It's not good to have them on the payroll, but yet no one in the company would recognize them if they saw them. Not working and receiving a salary—or doing work far too complex for their age—would be an audit risk.

Richard: Yeah, Nerre, we worked with an owner one time that had their younger grandkids on the payroll, but the extent of that work was just hanging out at the warehouse a couple days a week during the summer, which would probably be a red flag, right? So just a good reminder as owners think through all the considerations when employing a younger generation.

Nerre: Definite red flag. Another is the fair market value of the salary. You don't want to pay them $200 an hour for copying, so seek comparables. You can deduct your child's salary for federal income tax purposes, and that lowers the business income for the company. But on the child's side, if they're earning less than the standard deduction, then they're not going to owe any income taxes.

The standard deduction was bumped up because of the Tax Cuts and Jobs Act a few years back, and in 2026 that limit is $16,100. So that's quite a bit of earnings before they'll be liable for any income taxes.

I want to talk about a strategy that we like to raise when we're working with family business owners. And that's the Roth IRA for an employee. There's a whole section on this in our wealth planning guide for business owners that we put out this past January. And if you haven't yet read through that, I'll provide a link in our show notes.

But I do want to mention the highlights. Roth IRAs are particularly beneficial for young people because they have such a long stretch to retirement. During that long stretch, that Roth IRA can grow and appreciate without paying taxes every year unlike, say, a regular brokerage account.

The best strategy with a Roth account is to really leave it untouched until retirement. That way, you really maximize its tax-free growth potential. And remember, choosing tax-advantaged accounts really can bump up your savings and your ability to become financially secure or retire early.

If your child has actual earned income, they're able to open a Roth IRA. Those contributions to the Roth IRA are after tax, but as I said, it grows income tax-free. And if you take it out after 59 1/2, all that income is tax free as well. Your child can contribute up to the maximum, which is $7000 this year, or whatever they earn—so whichever is less.

But remember, parents can turbocharge that. So let me give you an example. If your child earns $5,000 in earned income because you hired them in your family business, here are some ways that you can maximize the Roth IRA.

Let's say she contributes half of that, $2,500, and the parents can match that with another $2,500, for a total of $5,000. So that's one way to have your child save, but they also get to spend $2,500. If you're not at all worried about teaching them to save, let her spend the whole $5,000 and the parents can contribute the entire $5,000 to the Roth IRA.

And that's because actual contributions don't need to come from the child's paycheck. The parents can make them from their own funds. She just needs to have actually earned income. And when you set up a Roth IRA for a minor, it's considered a custodial Roth IRA, meaning they're not going to get access to it. The parents will control it until that child reaches age of majority. Age of majority can be anywhere from 18 to 21, depending on what state you live in.

So those are some great perks. Distributions at retirement might seem like a long time away, so keep in mind that you can still take out contributions. So if at any time between now and 59 1/2 your child needs access to those funds, as long as they take out contributions—which as I pointed out were after tax—they're not going to pay taxes on those contributions. And when you do take a withdrawal, contributions are considered to come out first. So this is a really good strategy if you do have a child that you've hired in your company.

Richard: Yeah, I think that's such a powerful strategy. And you know, as we think about some of the benefits it can provide for younger generations, I was thinking about a family business we worked with that was a commercial shelving company—very successful family business. Two parents owned it with all three kids working in the business and even had their grandchildren employed, and they were able to not only create some tax savings for the business but create Roth IRAs for them.

And as you mentioned, this just provides such a powerful benefit at an early age, really instills that financial education. This business was also just a great example of a successful family business in general. Went on to great lengths to, you know, keep their family harmony intact and really share in decision-making effectively.

You know, as a family business ourselves, at First Citizens, we've seen firsthand how involving family can strengthen a company and build a legacy. I love telling this story, you know, when we work with other business owners.

Nerre: I'm glad you brought that up, Richard, because First Citizens is family-run. Even though we're a publicly traded company, we're on our fourth generation of that Holding family being involved in the business. And what's nice about that is not only do they have a personal investment, but they're there for the long haul. So they take a long-term vision with regard to the decisions they make for First Citizens, and that long-term vision drives everything we do—from our ability to develop new products and services to our culture and to our growth strategy. We're not focused on, you know, just whatever goals that we can increase over the next quarter. We're looking at things for the long haul, for our clients' experience and what's best for them.

Richard, there are lots of great things about family businesses, but we would be remiss if we didn't talk about the other side of the coin. Can you go through some of the challenges that they face?

Richard: Yeah, definitely. You know, I think the decision to accept any full-time job can be stressful, but with family businesses it's far more complicated. It's almost more of an unspoken social contract as it is an employment one. And because it's family, the consequences can be, you know, devastating and can last far longer. And as you know, Nerre, you know in a family business, things can go wrong quickly.

And, you know, between emotional decision making, trying to navigate through conflict and balancing family harmony all at the same time, there's a lot of issues that can arise.

You know, one example of that is the potential for favoritism and its impact on the team and family. You know, I think we could all agree having a child or relative thriving in the business would be one of the ultimate payoffs, right? You know, who's going to care more about the business than a family member who may someday take it over?

But favoritism when it comes into play can cause all sorts of issues. And you know, when promotions are based on relationships rather than skills, it can be demoralizing on family and nonfamily employees as well, when they feel that everything that they've put into it can be overlooked. And when certain family members feel and receive special treatment, it can cause entitlement and just fuel things like strained relationships, jealousy and power struggles.

Nerre: That's such a good, important point to make about favoritism. It also reminds me of a business that we worked with and how they navigated a power struggle. So the business had two family members that were running it after the parents set it up, and it was a son and a son-in-law. The son-in-law was very conservative and wanted to just focus on the core product that the company offered and make it better and make the clients more loyal towards them with regard to that product.

But the son wanted to grow, you know, other stores, grow geographically and just expand their reach. Neither one of those are wrong, but they are differing philosophies, and it was causing a lot of conflict in just the decisions they were making from day to day—like, you know, they're working capital and things like that.

So it was really important to figure out a way for them to get on the same page because it starts to bleed into their family life. You know, when one's not showing up to a family gathering or they show up and they start arguing, then you really see how navigating personal and professional boundaries becomes important, and you need to come up with a solution.

So that brings me to another step from our report that's really on point here with this discussion. And that is 70% of business owners use the same bank accounts for both personal and business finances, and they do almost the same—73%—with their credit cards. I'll tell you when I see that stat, it makes me gasp a little bit just because of the commingling of the financials, the increased liability that comes with not separating those two things out. It really adds a layer of complexity that may be unnecessary and is common when family members are involved.

And I do know that when we're advising a family and they're looking to transition out of the business, we do an informal valuation first, and we need to back out the salaries of those family members who are not integral to the business.

That helps normalize that amount. Usually, we're looking at a calculation like EBITDA. It helps to normalize it to what would a nonfamily business owner be valued at? Richard, have you seen this when working with business owners preparing for a transition?

Richard: Yeah, Nerre, and you know, this is where a lot of crossover can lead into personal wealth planning. I think when you start to think about all those considerations around being in the business—and then all of a sudden realizing that there is going to be a time when we're going to be out of the business, right, depending on when that potential exit is.

You know, a common theme we see with family businesses is that the focus tends to be solely on the business without really thinking about some of the personal wealth planning considerations.

That's something I'm really passionate about when we work with businesses and their families is that integrated personal and business planning, right? What is the impact of the business on the family wealth plan? And a lot of clients need that road map to help them kind of think through all those different pathways and the considerations when it comes to owning a business and the personal impact that it can have on it. So estate planning, risk management, retirement planning, tax planning, investment planning—those are all things that all business owners need to be thinking about.

Nerre: That's a lot of planning for business owners, and I know that you've done it all with business owners. Can you kind of conceptualize some of the best practices that you've seen that people should think about when they're hiring a family member?

Richard: Yeah, definitely. You know, one of those is creating what's called a family employment policy where leaders of the family can help foster a healthy balance between the business and family employees. I think one of the big kind of pros of that is to establish policies or guidelines that can help pre-decide issues or challenges that could eventually end up being damaging to the business and the family.

And those policies, you know, not only help avoid certain issues but it helps just position the family members to succeed, you know, especially for the next generation down the line. And company size doesn't matter. You know, whether you have 10 employees or 10,000, both have benefited from these types of family employment policies.

You know, as we think about kind of a framework for, you know, a healthy balance of family and business dynamics, there are a few themes that I think help create a good framework.

And you know, a couple of those are one—agree on meeting ground rules to just guide healthy discussions. You know, having these ground rules can just serve as a reference point for potentially difficult discussion, which we know with family businesses it's going to happen.

You know, start building a shared purpose—so talking about what you're trying to accomplish together. Doing so helps create that foundation for collective action. And you can also, you know, articulate that for a negative purpose, right, identifying outcomes you're trying to avoid by dealing with them now.

Another one would be focus on principles rather than people. You know, think about—avoid making decisions with specific people in mind and instead start with broader principles that, you know, you can then apply to a particular situation.

Lastly, you know, new ideas are often more acceptable if they're added on to old ones. You know, change is hard for families, right? I think for anyone. And it's more readily accepted when it's perceived as being connected to already-embraced values.

Nerre: Building on what you said, Richard, having a solid framework in place, that's so key. So things like formal agreements, conflict resolution plans, buy-sell agreements—they're really important to legitimize the employment. And if you document the hire like any other compensated employee with a W-4, W-2 or 1099, if they're independent, it reduces the chances of scrutiny from other revenue agencies, whether federal, state or local.

It also helps to have clearly defined roles. That can go a long way in keeping things professional and minimizing conflicts. It's all about creating structure so the business can succeed without putting your family relationships at risk.

So back to our surveyed business owners. Many of them are looking to exit in 10 or more years, but more than twice of them are likely to exit and transfer to family owners. And that's interesting. It could mean they're prioritizing family involvement as part of their long-term vision. Connecting to what you said earlier, Richard, about family members are a known entity, right? They're going to have the same values and vision for the company, more likely than, say, a third party.

But there's also a lot going on in our economy. Richard, tell me what you think. Do you think business owners are pushing transition out so far? I mean, 10-plus years is a long time. Could that mean that exiting just feels too complicated and they're kicking the can down the road? Or is the economy telling them, "Hey, this business gives my family stability, and I want to keep it in an unstable world."

Richard: Yeah, and that's a great question. I think there are a lot of factors that go into that consideration. You know, certain owners, you know, whether it's they know their family members are going to take over one day but maybe think they aren't ready or maybe aren't sure of when they want to give up control. There's a lot of factors that go into delaying, you know, ultimately creating a plan.

Either way, you still need to figure out what that transition is going to look like, right, if you want to ensure the family business can generate generational wealth. You know, look at the Rothschild family, for example. Back in the 1700s, they built a banking empire by giving each son a bank in a different country to avoid conflicts. You know, they had all these strict rules to keep control within the family, and it worked. You know, they preserved their wealth for generations through to today.

But I think the key point there is with the right planning, you know, family business can do more than just survive. And that's where, you know, creating a legacy that lasts beyond, you know, three generations is key.

Nerre: That's so impactful. I love that Rothschild story. And while we can't all have our own bank, there's a lot of great strategies that we covered today that really helps you get on the path to generational wealth. So let me summarize the key takeaways.

Evaluate whether employing a family member aligns with your business goals. Is it a good idea? Set some clear expectations if you choose to hire one, and set boundaries and formal agreements to avoid conflicts. And lastly, explore tax benefits in some long-term financial strategies like the Roth IRA to maximize value. Plan early for family involvement and business transitions to really preserve your legacy.

Richard, what are some things people can do right now to make sure they're making good decisions when it comes to their family business?

Richard: Yeah, great question. You know, one is just reflect on your own situation, and think about what are the areas where family involvement could strengthen or challenge your business, right? And what are the planning opportunities that could come along with that?

And you know, just a quick plug for our business advisory services. You know, our team specializes in helping business owners create that road map to address all these issues and focus on the integrated business and personal planning, helping them to develop a plan around their top priorities. And everything from refining your ultimate exit plan to understanding what is your business worth? You know, we'll work with you to develop a plan that's tailored to your goals. But you know, thoughtful planning can really make a huge impact on business and ultimately lead to a successful and lasting legacy.

You know, if this resonates with you, reach out to a planning strategist and discuss your unique circumstances to create a customized plan.

Nerre: Good low-key plug for business advisory services, Richard, a team you're a part of. But seriously, it's an important point. Business owners often feel like they have to do everything themselves. This is one area where you really want to lean on the specialists.

Okay, thanks for joining us today, and thanks to all of you for listening to today's episode of Building More Than Business. Subscribe and share if you like what you've heard. We'll see you next time.

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