Balancing Family Ties and Business Growth: Hiring Strategies for Small Business Owners
Key findings
- Many small business owners rely on family members. Nearly half of U.S. small businesses employ family members, and more than 1-in-5 hire a family member as their first employee. Family members help a business get going, but there are high-stakes implications that business owners should consider when hiring family.
- Increased flexibility is among the benefits of hiring family members. Family members may be able to help out when the business is going through a rough time, and, while you want to talk with a tax advisor, there may be tax benefits to hiring a family member.
- Small business owners may want to look outside their home if interested in growth. You’re an expert in your business and industry, and family members may not have the same specialized knowledge. This could put you at a competitive disadvantage.
Imagine you’re launching your dream business. Your first hire isn’t a stranger—it’s your sister.
Hiring a family member as your first employee is a choice that over half of small businesses make, as revealed by Gusto’s State of Small Business Survey. But is it always the best strategy? In this post we discuss the prevalence of hiring family members for your new business, and the risks and benefits of doing so. Making sure that your hiring strategy is aligned with your business goals can help ensure long-term success.
Many small businesses owners rely on family members
Running a small business is much more than a 9-5 job. Small business owners don’t clock out at the end of the work day, are constantly thinking about the next project or sale, and rely on their employees to care about the business as much as they do. This may be why many business owners often seek the help of family and friends to build and establish their business. In Gusto’s 2024 State of Small Business Survey, we asked small business owners about their experience running a business. We found that over half of small businesses employ people from the business owner’s family.
When considering a hiring strategy, it’s important to understand the risks and benefits of hiring friends and family, and the types of tasks that they could do for your business. Using Gusto’s nationally representative survey, we’ll discuss the types of tasks business owners assign to their personal networks and then we’ll highlight important considerations for your business.
Family members and friends are often a small business owner’s first hire
New businesses require a lot of attention. Entrepreneurs must make sure that their business is compliant with all federal and local regulations, that it has a place from which to do business, that it has sufficient customers to support the business, and that it has adequate staff to provide value to customers, among many other things. This means that businesses must move quickly to find employees, and nearly ⅔ of small businesses told us that they hired their first employee in the first two years of operations.
With so much going on, and so many decisions that need to be made quickly, small business owners may not have time to consider a full applicant pool to meet their talent needs. After all, there are problems that need to be solved today and customers who need to be served now. It’s understandable that nearly half of small businesses report that the first hire was a family member (22%) or friend (26%).
A business’s early hires are critically important to both the business and the economy. Most of a small business’s growth happens in its first two years in business, and most net-new jobs created by the U.S. economy come from businesses that are very young. Understanding these jobs, and the risks and benefits that hiring from personal networks poses to small businesses, can help set the business up for success.
Hired first to build business, despite risks
Small business owners put a lot of trust in their early employees to build their businesses and to protect their reputations for the long term. It’s unsurprising, then, that so many business owners seek to give essential business-building tasks to their family-employees. Things like leading the business, initiating sales, and putting the business’s best foot forward through marketing are important tasks for establishing and growing a new business. Business owners whose first employee is a family member are three times more likely to say that they assign leadership tasks to their first employees than those who do not hire family first, and family members are 1.25 times more likely to be responsible for sales.
In many cases, hiring a family member is convenient and allows small business owners to mitigate risks associated with hiring strangers. Additionally, hiring family members may allow the business owner more flexibility to control costs and increase employee output. However, by not considering external hires, small business owners may be losing out on talent with specialized skills outside their personal connections, and the business may suffer as a result. The next section will discuss some risks and benefits to hiring family members when considering your hiring strategy.
Advantages to hiring family members
May boost business flexibility
Small business ownership is often a family affair. Although more than half of small businesses employ a family member, many more rely on family for informal advice about the business, flexibility when managing personal and professional obligations, and even financial support. Small businesses are often already seeking out the assistance of their family members, so it’s natural to consider the circumstances under which a small business should consider hiring family members.
Can provide relief when resources are tight
Hiring employees can be expensive for many small businesses. In addition to the cost of labor, businesses are responsible for a share of payroll taxes, paying unemployment insurance premiums, and may even provide benefits–all of this means that the actual cost of an employee can be 25-40% higher than their wages alone. When resources are tight, small businesses may seek some relief by seeking help from family. This is underscored by nearly 7% of businesses reporting that family members do unpaid work for the small business in the State of Small Business Survey. However, even family members who do receive pay for their work may help cash-strapped businesses through earning lower than market wages, working more hours than they’re paid, or having lower expectations around pay raises.
Can step in when there’s difficulty finding the right hire
Gusto’s State of Small Business Survey found that businesses that employ family members of the business owner were 50% more likely to say that they had difficulty hiring in 2024 than businesses that do not employ family members. This is even more true at the smallest businesses. Nearly 50% of small businesses with fewer than 5 employees who employ family members had difficulty hiring last year, compared to only 29% of similarly sized businesses that do not employ family members.
It is unlikely that employing family members causes difficulty hiring, instead small business owners may be asking family members to step in and solve immediate staffing shortages. If a business is unable to find somebody to do necessary work for the business, then the business owner–who needs an employee because she has customers to serve and product to move–will seek out family members to meet demand.
Tax and financial advantages
If a family member is a true employee of the business, then their taxes and benefits may be deductible from the business’s profit as business expenses. This could lower the self-employment tax liability of the business owner’s personal income. Additionally, if the business offers educational expense benefits to its employees, the business owner may be able to provide these benefits to their children and receive a special tax deduction if the child is of sufficient age, a true employee, not a substantial owner of the business, and not a dependent of the business owner. Finally, children under the age of 18 who support a family business may not be subject to FICA or other taxes. Understanding how these potential benefits align with specific circumstances can be a valuable step for businesses that are considering hiring family members.
While the information contained in this post is intended to be instructional and informational, and not tax or legal advice for any small business owner, small business owners may find it beneficial to assess if these benefits apply to their situation. Those who are interested in these deductions should consult their tax and legal advisors to determine if these deductions are appropriate for them.
Disadvantages to hiring family members
May hurt your business’s ability to compete
Small business owners need employees who they can trust and who will provide stability for their business. For many, this is one of the most compelling reasons to hire family members. However, family members may not be the most qualified candidates to fill open roles, and may hurt the business’s long-term growth and stability.
May limit your understanding of the market
Entrepreneurs generally start businesses in industries where they have specialized knowledge. After all, the best way to address a pain point and solve a problem is through experiencing the problem yourself. While hiring personal connections may be convenient and provide flexibility, they likely do not have the same deep understanding and hard-won knowledge that you have of your targeted customers and their problems. Hiring family members may limit the breadth of perspectives and skills within their teams. This approach may inadvertently stifle innovation, as your employees are likely to share similar viewpoints and problem-solving approaches to your own or those of your immediate circle.
Moreover, relying too heavily on family or friends can create difficulties if your business intends to scale. As your company grows, you’ll need specialized skills and experiences that may not exist within your immediate circle. Building a team with diverse backgrounds and expertise prepares your business to handle increased operational complexity, manage a broader customer base, and enter new markets. Without this strategic growth in talent, your business may struggle to keep pace with competitors or adapt to evolving customer demands.
May disrupt professional and personal relationships
Hiring a family member first often means that small business owners will need to maintain that professional relationship. Terminating a family member who is not the right fit for a role can be awkward, and lead to family frustration and a breakdown in important personal relationships. In fact, nearly ¾ of business owners who hired a family member as their very first employee continue to employ a family member today. Comparatively, only ⅓ of small business owners who hired someone other than a family member as their first employee have a family member on payroll today. Hiring family members may allow small business owners to hire someone they trust and financial flexibility for the business, but it might limit future flexibility to hire someone with skills better suited to the role.
Risks of assigning critical administrative work to family
Over 40% of family members employed by business owners are doing back-office work. These tasks may not be critical to business building, but they are often necessary work for the business’s long-term success.
Things like scheduling customer appointments, doing bookkeeping, or maintaining necessary licenses and compliance with regulations are critical for maintaining the business’s operations. Having a family member handle these tasks may make sense in the shortterm. Afterall, you’re focusing on your customers and tight cashflows make it difficult to hire an employee. However, in the long run, you miss out on the opportunities to ensure that your organization is using best practices to protect your finances. Hiring subject matter experts ensures that your business is getting the best support possible, and that your business is benefiting from all of your employees. Without doing this, your business may make critical and expensive compliance errors or inefficiently schedule customers, both of which might hurt the bottom line.
While these tasks may seem to be peripheral to the actual work of the business, ensuring that they are completed correctly and efficiently ensures that the business is able to continue to operate, has the cashflow to do so, and operates within the legal confines of its industry.
Strategies for expanding your talent network
Evaluate your hiring plan in order to expand your candidate pool
A stable economy means that many small businesses may be on the precipice of growth. Making sure you’re ready to go when it’s time to hire ensures that you aren’t scrambling to fill roles. You can do work now that will make hiring a more streamlined process through developing clear expectations for roles, how you will evaluate candidates, and establishing structured interviews so you can quickly and consistently evaluate candidate skills. This will make sure you’re ready to move quickly and confidently when the opportunity to add talent to your business arises.
By expanding your candidate pool to include professionals outside of your family, you open your business to fresh ideas and innovative strategies that could help you stand out in a competitive market. These hires can challenge existing methods, identify overlooked opportunities, and bring expertise that complements your understanding of the industry. This diversity of thought isn’t just a boost for creativity—it’s also essential for navigating complex challenges and adapting to market shifts.
Mitigate risk by hiring a contractor or from your professional network
There are hiring strategies to consider when looking to balance the needs of the business now with its later needs. Small business owners who wish to maximize stability and skills necessary for success in the role may consider hiring from their professional networks. Small business owners are likely to be well into their careers, meaning that their networks are broad and include many people who are qualified to perform well in open positions. Additionally, small business owners can consider hiring temporary contractors to mitigate some of the long-term risk associated with hiring an employee. In recent years, small business owners have increasingly turned to professionals hired as contractors to do work for their business. These can be short term arrangements, or the business owner can use this as an extended opportunity to evaluate a contractor’s work before hiring them as an employee.
Consult a mentor
Being a small business owner is hard, and there is a lot that can be learned from the experiences of others. Find someone who is a bit further in this journey and seek their advice. Talk through what’s important to you in hiring your employees, how that aligns with your business goals, and learn how they identified and hired their best employees. Take the best of what they did, and learn from their mistakes when developing your own hiring plan.
Conclusion
Small business ownership is deeply personal, often involving the close support of family. While working with people you know and trust offers distinct advantages—like flexibility and potential cost savings—it’s essential to weigh these benefits against the potential risks to your business’s long-term growth. Hiring family members might solve immediate challenges, but neglecting outside talent could limit innovation and competitiveness.
To ensure your business thrives both today and in the future, take proactive steps: develop a clear hiring plan, seek guidance from mentors, and tap into your professional network. Consider the value of diverse perspectives and specialized skills that external hires can bring. Whether it’s hiring contractors for short-term needs or expanding your search to find the right fit, aligning your hiring strategy with your long-term goals is key.
By striking a thoughtful balance between personal connections and professional needs, you can build a resilient, innovative team that sets your business up for sustainable success. Take the next step now—start evaluating your hiring strategy and planning for the future.
