Remember Business Basics When Paying Relatives

Posted on Tuesday, October 17, 2017

Paying family members wages, salaries and bonuses and dividing profits among them can be tricky.

Fringe benefits, including deferred profit-sharing plans, pension plans, insurance programs and stock purchase plans offer an excellent means to compensate family members and, at the same time, help them build personal assets.

Keep in mind that certain fringe benefits are taxable and some perks cannot be provided on a discriminatory basis — just to shareholder-employees of the business — without providing them to all employees. Consult with your tax advisor for more information.

It's not uncommon for some employees to feel they're underpaid, but the same complaints are more personal in a family business. Different siblings may make different salaries or one relative may actually work more than another, even though they both earn the same compensation.

Although some complaints will always exist, family business owners can ease some of these tensions and discrepancies — real or imagined — by looking critically at the company's compensation policies. They may need to be reworked to reflect the true value of managers and employees.

Salaries are best handled by matching them to industry guidelines. Determine local salary ranges for various jobs and use them as a guide for paying both family and non-family personnel. When you tie salary to a job description, you recognize the value the industry puts on positions and you treat all employees more equitably. If you pay above, below or at market norms, make sure everyone is paid at those levels.

If you opt for a combination of salary or hourly wages plus bonuses, look carefully at the justification for additional payments. Holiday or similar bonuses that go to all employees are a relatively simple matter. However, performance bonuses should reflect actual benefits to the company, as well as the company's stated and practiced policies.

For example, a family-owned construction company might pay bonuses to employees who finish work ahead of schedule, but not if the work is done poorly because the business prides itself on quality.

Carefully Examine Bonus Plans

Bonuses for the sake of bonuses don't benefit the company, nor do they provide incentives for better performance from family or non-family employees. Of course, some family members may have done more than work in the business. They may have also put money into the company, particularly in the early years.

You can recognize that equity, and perhaps some of the sweat equity put in before the company expanded outside the family, with dividends paid out of the company's profits. The dividends can go up or down with the success of the company and can be paid on a periodic or one-time basis.

Profits Fuel Growth and Future Success

Be careful how much you pay out, both in terms of wages, benefits and dividends. How the profit pie is divided is vital to growth in a small business. If you don't feed your business, eventually it won't feed you.

Profits are the seedbed for expansion. If you don't reinvest some earnings in equipment, training and expansion, the business may eventually falter. Family members should realize the importance of retaining some of the earnings each year. In addition to providing funds for growth, profits funneled back into the business provide a cushion for downturns and show financial prudence to lenders.

Posted in Tax And Accounting Topics For Business

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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