When Family Members Work in the Company

Who is Included?

Family members or close relatives include grandparents, parents, parents-in-law, stepparents, spouses, partners in a marriage-like or civil partnership-like relationship, life partners, siblings, (mutual) children, adopted or foster children of spouses or life partners, children-in-law, grandchildren, sisters-in-law, and brothers-in-law.

If someone from this group works in your company, various obligations regarding social security contributions and taxes may arise. The decisive factor is the scope and nature of their work.

A Brief Classification

When family members work in a company, a distinction is made between family-based assistance, an employment relationship, or a partnership in the business. These aspects need to be clarified.

Particularly concerning social security and tax authorities, there are important points to consider. The classification of a person’s employment status directly impacts the legally prescribed social security and tax obligations for the company!

Details

The following factors typically characterize family-based assistance: Family members help only occasionally and at irregular intervals in exchange for payment. The compensation provided is not appropriate (but rather too high) for the work performed. The family member is not subject to directives. In this case, there is no dependent employment relationship, and no social security obligation arises.
In a dependent employment relationship, social security contributions are always required—just as with any employment relationship involving “external” employees.
Whether a partnership in the business (Mitunternehmerschaft) exists can only be determined on a case-by-case basis. However, it is generally assumed if the family member shares the economic risk of the business to a significant extent or if a community of property exists between spouses.

An Important Note:

From a tax perspective, family members may have a different status than from a social security perspective. According to the case law of tax courts, they may be considered employees, while social courts may classify them as business partners.
Therefore, it is essential to clearly document and verify the exact employment status of the family member within the company.

Social Security Obligation for Family Members

If family members are to work in the company, you must register their employment with the relevant health insurance provider. The health insurance provider will then send a questionnaire to determine the individual employment status of the family member.
Depending on how the employment relationship is structured, social security contributions may be required.

The following rules apply:

There is no social security obligation in cases of family-based assistance.
Social security contributions are required if family members are integrated into the company and work under instructions like regular employees.
Family members working as self-employed individuals must bear genuine entrepreneurial risks to avoid being classified as pseudo-self-employed. They are usually not subject to unemployment insurance.
Family members must receive a standard market salary to be considered subject to social security contributions.
They can work as mini-jobbers (earning up to €556, max. 43.37 hours per month), which involves flat-rate contributions.
If spouses or children work only marginally in the business, they may still remain covered under statutory family health insurance.
Family members working in the company must generally be registered with the employers' liability insurance association to ensure accident insurance coverage.

Tip
If there is uncertainty regarding social security status, you can request a status determination procedure at the Clearing Office under § 7a (1) SGB IV. The German Pension Insurance (DRV Bund) will then determine whether the person is classified as an employee or self-employed.
If the health insurance provider is unable to make a clear determination, it will also refer the case to the DRV Bund for a final decision.

Tax Aspects

Tax authorities are often particularly critical of employment contracts between business owners and family members. This is because businesses can reduce their taxable profits by deducting wages paid to family members as business expenses in cases of legitimate employment.
Even minor deviations from standard employment practices can lead the tax office to classify the contract as tax-ineffective. Unclear or undocumented payments can also result in additional tax claims.

Important Considerations:

The employment contract must not be fictitious (§ 117 BGB). Family members must not be business partners or merely providing informal family assistance.
Family members working as employees are subject to standard payroll tax deductions.
To ensure that salary payments are recognized for tax purposes, there must be a clear, commercially standard employment contract.
The salary must not be excessively high or too low; it must align with market conditions to be tax-deductible. Excessive salaries may lead to partial disallowance of the expense as a deductible business cost.
Other employment conditions (e.g., vacation entitlement, overtime regulations, bonuses) must also follow standard industry practices.
The contract must be strictly followed by both parties. If wages are not paid regularly or payments are made without actual work being performed, the tax authorities may classify the contract as invalid for tax purposes.

What Should the Employment Contract Include?

An employment contract with family members should, according to the German Nachweisgesetz (Proof Act), include at least the following essential terms of employment:

Start date of the employment relationship
Description of the tasks to be performed
Work location and working hours (including total working hours, breaks, possible shift systems)
Salary details, including amount, payment schedule, and bank account information
Vacation entitlement
Reference to applicable collective agreements, company or service agreements, if any
Termination conditions, including notice periods and formal requirements for termination
Conditions for contract modifications
Signatures of both parties

Further Important Tax Aspects for Employed Family Members

Tax-free non-cash benefits (e.g., fuel vouchers up to €50 per month) can be granted if they apply to all employees.
Family members classified as employees can participate in company events and benefit from tax-free allowances (up to €110 per event).
A home office allowance may also apply to employed family members if the legal requirements are met.
Tax-free employer contributions (e.g., for childcare or commuting expenses) can be paid to family members if they apply to all employees.
Pension contributions paid by the company for employed family members can be claimed as business expenses.
When transferring company shares to family members, inheritance and gift tax allowances can be used.
If the company is subject to trade tax, personnel costs for employed family members can be deducted as business expenses.

When Family Members Are Shareholders

If family members are shareholders in a company, special tax and social security regulations apply. Here are some key aspects:

1. Tax Aspects

Family members as shareholders usually receive profit distributions, which are subject to capital gains tax (for corporations) or income tax (for partnerships).
Payments to shareholders must follow standard market conditions. Excessive salaries or unreasonable rent payments may be classified as hidden profit distributions, leading to tax reassessments.
Even a 1% stake in a GmbH (limited liability company) can have tax implications, particularly regarding the taxation of dividends or the partial-income method.
If a family member shareholder also works in the company, their salary must be reasonable to be recognized as a business expense.
The transfer of company shares to family members can benefit from tax exemptions. Under certain conditions, tax advantages apply for business succession (§ 13a ErbStG – German Inheritance Tax Act).

2. Social Security Aspects

Family members who are shareholders are not automatically subject to social security contributions. The key factor is their actual influence on company management.
Managing shareholder of a GmbH: If a shareholder holds more than 50% of the shares, they are classified as self-employed and not subject to social security contributions.
Minority shareholders with management roles: If a shareholder holds less than 50% but has significant influence, their social security status is assessed on a case-by-case basis.
Shareholders of an OHG, KG, or GbR are generally classified as self-employed and are not subject to statutory social security contributions.

Note

Since social security and tax regulations are highly complex and can lead to many individual cases, you should seek professional advice if you are unsure. Possible points of contact include the Chamber of Industry and Commerce (IHK), the Chamber of Crafts (HWK), your tax advisor, or other experts. You may also consider using the Clearing Office mentioned above for clarification.