Family Members in the Business: Social Insurance and Tax Considerations”

Preface

Close family members include grandparents, parents, in-laws, step-parents, spouses, partners in a marriage-like or life-partnership-like community, life partners, siblings, (shared) children, adopted or foster children of spouses or life partners, daughters- and sons-in-law, grandchildren, sisters-in-law, and brothers-in-law.

An important note

Family members can have a different status from a tax perspective than from a social insurance perspective. According to the jurisprudence of tax courts, they may be considered employees, while according to the jurisprudence of social courts, they may be considered co-entrepreneurs.

Therefore, it is always crucial to precisely determine the "employee status" of the family member in the business. Especially with regard to social insurance and the tax office, there are several considerations to keep in mind. Assigning a specific status to employees has an impact on the legally prescribed social insurance and tax determinations for the company!

Social Insurance Obligation

If family members are to work in the company, employers must register the employment relationship with the relevant health insurance fund. Subsequently, the health insurance fund will send a questionnaire to clarify the individual employee status. Depending on how the employment relationship is structured, social insurance obligations may arise. If the situation is not clear, the individual case is forwarded to the German Pension Insurance Federation (DRV Bund) for a final decision.

A brief classification

In the case of family members working in the business, a distinction is made between familial cooperation, a dependent employment relationship, or a co-entrepreneurship.

If there is uncertainty regarding the social insurance status, employers also have the option, according to § 7a para. 1 SGB IV, to request a decision from the German Pension Insurance Federation (DRV Bund) on the employment status (dependent employment or self-employment) in an inquiry procedure or status determination procedure conducted by the Clearingstelle.

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Taxes

Especially the tax office is often critical of contracts between business owners and family members because here the business can save taxes, for example, wages for family members can be deducted from the profit as a business expense in the case of dependent employment. Often, even with minor deviations from the "usual," the tax office classifies the contractual relationship as fiscally ineffective:

Therefore, one should definitely consider the following, among other things:

• The contract must be adhered to by both contracting parties. If salary payments, for example, are not made regularly or money is paid when family members are not working, the tax office classifies the contractual relationship as fiscally ineffective.
• The agreed conditions must be at arm's length. In the case of excessive payments, at least part of the payments may not be allowed as a deduction.

Anyone wishing to enter into contracts with family members should, as a precaution, consult with their tax advisor beforehand to be able to present truly (tax law) secure contracts with family members.

Note: With the Notification Act that came into effect on August 1, 2022, the scope of the essential contractual conditions of the employment relationship to be disclosed to employees has been expanded. Therefore, an employment contract with family members should at least include statements on the following facts:

• Start of the employment relationship
• Description of the work to be performed
• Workplace and working hours (including the time required for the activity, rest breaks, if applicable, shift system)
• Amount and composition of the salary, as well as payment date and information on the salary account
• Entitlement to leave
• Reference to applicable collective agreements, works or service agreements
• Statements on notice periods and other formalities in the event of termination
• Statements on modalities in the event of changes to the contract
• Signature of both parties

Conclusion

If a family member is to be employed as an employee in the company, there must be a genuinely desired and contractually executed paid employment relationship that can be proven, which requires, in particular, the personal dependence of the family member (employee status) on the employer. It must also be excluded that the employment contract is concluded only as a sham.