---
title: Should You Put Family on Payroll?
description: Weigh the pros and cons of hiring family members in your business, from trust and tax benefits to potential conflicts and CRA compliance. Learn strategies for success.
---

[Blog ](https://mesa.cpa/blog)

# [Should You Put Family on Payroll?](https://mesa.cpa/blog/should-you-put-family-on-payroll)

 Written by [David Oliveros](https://mesa.cpa/blog/author/david-oliveros) | Jan 13, 2025 4:59:40 PM

Bringing family into your business can feel like the ultimate trust move. After all, who knows you better than family? But blending personal life with professional goals isn’t always a recipe for success. Before you hand over that employment agreement to a sibling, spouse, or child, it’s crucial to understand both the opportunities and potential conflicts of hiring family members.

 

## 📅 The Upside:

- **Trust & Loyalty**: Built-in reliability and dedication.
- **Shared Vision**: Family ties often mean a deeper understanding of your business goals.
- **Commitment**: Dedicated employees like family members often step up when the going gets tough.
- **Tax Benefits Through Income Splitting:** Leveraging income splitting in family-owned businesses can reduce income tax burdens by distributing income to relatives in lower tax brackets, provided CRA rules are followed.

#### Example of Income Splitting:

Meet David, the owner of a family-owned construction business in British Columbia, earning $400,000 annually. David’s wife, Lisa, helps with bookkeeping, and their son, Alex, manages the company’s social media part-time.

 

📊 **The Problem**:

 

If David claims the full $400,000 as personal income,he faces high federal income taxes.

 

✅ **The Strategy**:

- David pays Lisa $60,000 for her bookkeeping services.
- Alex earns $20,000 annually for his social media work.

📈 **The Outcome**:

David reduces his taxable income to $320,000, lowering his federal income tax. Lisa and Alex’s salaries are taxed at lower brackets, maximizing the family’s overall economic security.

 

***Pro Tip**: Always pay family members an equitable wage aligned with fair market value to avoid triggering audits.*

 

### 📊 Understanding Income Splitting and CRA Rules

Income splitting is a legal tax strategy, but the Canada Revenue Agency (CRA) has strict anti-abuse policies:

- **Reasonable Compensation**: Ensure family members receive pay aligned with their job responsibilities. Paying an unreasonable salary risks penalties for abuse of tax benefits.
- **Document Everything**: Maintain records like job descriptions, timesheets, and employment agreements. Documentation prevents negative consequences, such as CRA denying deductions or applying interest.
- **Avoid Preferential Treatment**: Family members must meet the same standards as non-family employees.

**When TOSI Applies**:

- The family member doesn’t meaningfully contribute.
- Compensation is disproportionately high.
- The recipient is under 18.

**When TOSI Does NOT Apply**:

- The family member works at least 20 hours weekly.
- Their pay is fair for their role.

## ❌ The Downside to Hiring Family Members:

- **Blurred Lines**: Family dynamics can spill into the workplace, creating personal conflicts.
- **Perceived Favoritism**: Nonfamily employees may feel sidelined, leading to resentment or a negative employee experience.
- **Audit Risk: **Without the proper documentation, hiring family members can turn into a serious audit risk

### ✅ Checklist for Hiring Family Members:

1. **Define Clear Roles**: Provide detailed job responsibilities in an employee handbook or agreement.
2. **Stay Fair**: Avoid differential treatment—family members must meet the same standards as other employees.
3. **Set Boundaries**: Separate family life from business relationships.
4. **Document Everything**: Employment agreements, payroll taxes, and performance reviews ensure compliance.
5. **Understand CRA Rules**: Follow income tax withholding and TOSI regulations to avoid negative effects like audits or penalties.

### 🚨 What Happens if You Ignore CRA Rules?

Non-compliance with CRA guidelines can result in:

- Reassessment of your taxes.
- Denied deductions for salaries paid to family members.
- Interest charges and penalties.

***Pro Tip**: Consult a legal expert or Family Business Consultant to navigate these complex regulations.*

### 📝 Bottom Line:

Hiring a family can be a game-changer—or a headache. The key is clear boundaries, fair treatment, and open communication. When done correctly, leveraging income splitting and staying compliant with CRA rules can turn hiring family members into a smart business decision.

 

👉 Make informed decisions and create a workplace culture that benefits your business and family. [Learn more about payroll.](https://mesa.cpa/blog/how-to-setup-payroll-and-run-it-too-canadian-business-owners-guide)

[View full post](https://mesa.cpa/blog/should-you-put-family-on-payroll)

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