In this blog post, we will go over all the dos and don’ts when employing family members in your business in Ireland. According to the Central Statistics Office, there are over 160,700 family businesses in Ireland. It is common in these SMEs that sons, daughters, uncles and aunts and extended family members are all playing their role in running the business.
From a tax perspective, you need to consider what is an allowable deduction against trade income and what is not going to be allowable as a deduction. The only wages that will be deductible against your trade income will be for wages paid that are ‘wholly and exclusively’ just for the purpose of the trade.
Tax Deductible Vs Non-Tax Deductible Expenses
What does this mean in practice? Any wage payments made to family members must be for work actually carried out and involved in the day to day running of the business, rather than for any other purpose. If it is viewed that the payment was for any other purpose than the trade then these expenses will not be allowable tax deductions.
As this is not always very clear cut, the Revenue Commissioner takes a principle-based approach to decide what is deductible and what is not deductible. The principles are focused on whether the purpose of the payment is for the private benefit of the taxpayer or not. There can be cases where it is of personal benefit to the taxpayer but this is just a coincidental effect of the payment, in the cases, the expenses may still be allowable as deductions. In general though if the payment was made purely for the benefit of the taxpayer (business owner) then this will not be an allowable deduction.
For example if a business owner was paying their child a few hundred euro a week to be an ’employee’ but the child was sitting at home playing the PlayStation and not working, this would be breaking the principles that the Revenue Commissioner has laid out.
There may also be situations where only a partial deduction is allowable. If it is clear that the payment is related to some work that is related to the trade and other work that is not related to the business trade, then only the trade-related portion will be allowable as a tax deduction.
There is also very clear guidance from the Revenue Commissioner when it comes to how excessive payments should be treated. When a business hires a family member, the wages paid must be justified when considering the work actually performed and the experience/qualifications of the family member. The rate paid should be the equivalent that would have been paid if it were not a family member that was hired.
Example: John Murphy runs a Gym and his 15 year old son Michael helps him out every week, usually for about 10 hours on the weekends cleaning machines, mopping floors and signing up new members. For completing these duties he is paid €40 an hour, this equates to €20,800 per year.
As John has no prior experience and is earning well above the going rate for this type of work, especially for someone of 15 years old this would be considered an excessive payment. John Murphy in this case may only be able to make an allowable deduction for a fair wage for his son which in this case may be the minimum wage for someone his age.
Is there a tax benefit to employing a Family Member?
In 2022, a person can earn up to €17,000 and pay zero PAYE and just €160 USC. It will be the employer’s responsibility to register the family member as an employee and pay Employers’ PRSI on their behalf.
The business owner is more than likely paying marginal tax rates of up to 52%, therefore it would be more tax-efficient giving money to a spouse, child or another family member through the business rather than from the business owner post-tax earnings.
But as we have already gone through in detail, these payments must be bona fide, non-excessive and wholly and exclusively for business purposes. The family member will have had to have done the commensurate work to have earned such wages.
It is vital to talk to your accountant before setting up any such arrangements to make sure you are making the most tax-efficient decisions for your business.
Disclaimer: this blog post is for informational and educational purposes only and should not be construed as financial advice.