Tax implications of employing family

pexels-photo-910330The vast majority of businesses in Ireland are family run businesses.  Often the whole family are involved to some degree in the business.  This can include assisting with the administration and bookkeeping of the business to children helping out during weekends/summer holidays.

Can Family members be paid a wage?

The first thing to note is that paying family a wage for working in the business is allowable and is the same as employing any other employee.  The employment should be registered with Revenue and PAYE/PRSI operated on the wages paid to the family members.

Revenue review of wages paid to family

While employing family members in the business is allowable, there are some areas that Revenue review to ensure this is not used by taxpayers for tax avoidance purposes.  Revenue have recently released a new manual on the issues they encounter when reviewing family employments.

The main things that they will look at is that the net pay is actually paid to the family member by the business.  This is to prevent an employer putting through an employment purely to lower their tax bill without actually paying the salary to the family member.

The second main issue that Revenue review is the amount of wage paid to the staff member and whether or not this is in line with the experience and qualifications of the family member.  The number of hours worked would also be reviewed to see if it is reasonable (e.g. family member going to school cannot also work a 9 – 5 job during the week).

This issue was subject to a hearing at the Tax Appeals Commission. The ruling in this case found that the hours were excessive given the employee was in school and their rate of pay was above their level of experience and qualifications.  In this case the Appeals Commissioner reduced the allowable pay that could be claimed by the employer to a more reasonable level.  This ruling shows that, while wages paid to a family member are tax deductible, the pay rate should be commensurate with the employees experience and qualifications.

Employee tax credits and PRSI

The employee tax credit is not available to a person works in their spouse’s business or in a company in which their spouse owns more than 15% of the share capital.  A child of the employer is also not entitled to the PAYE credit unless:

  • Their job is insurable under the PRSI system
  • Tax has been deducted from their wages
  • They are paid at least €4,572 per annum
  • They are required to devote throughout the year substantially the whole of their time to the employment

The correct PRSI class must also be determined for family members. This can depend on whether or not they are employed in a sole trade business or through a company.  The Department of Employment Affairs and Social protection have published guidance on the correct PRSI class in family employments.

PAYE Modernisation

The PAYE Modernisation system due to be implemented from the 1st January 2019 will also impact of family employments.  Under this new system Revenue will need to be informed of all wage payments before payment is made to staff member.  This will include any wages paid to family members.  This will affect employers who paid a monthly direct debit and calculated the final salary’s at the end of the year.  This will no longer be possible under the new system.

Find out More

If you would like to discuss the payroll implications of hiring family members please give us a call on 01 2051700 or email us at info@haydon.ie

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s