Does hiring family make sense? It depends on their skills and how working together will affect family dynamics. And it can also be smart from a financial and tax perspective.

On the business side, Mark Goodfield, partner at BDO LLP, suggests family members can show great loyalty as employees, and better understand that their hard work helps the well-being of the family. Employing family members also helps them build their résumés.

On the financial side, splitting income with a spouse in a lower marginal tax rate can save thousands in taxes and boost your net earnings. And paying wages to a school-age child can make more sense than covering his expenses from your own income.

Business as usual

If you hire a family member, document the relationship in a written employment agreement, says Thomas Fellhauer, a tax lawyer at Pushor Mitchell LLP in Kelowna, B.C. “The pay, hours and other terms [should be] similar to what you would do for a non-family employee. That is very helpful in the event of a tax audit.”

It helps from a non-tax perspective as well. Treat the family member like you would any other employee. This sends a message to other employees that the same rules govern all staff, which helps morale. “No one likes to see another employee get special treatment solely for the reason that they are related to the boss.”

However, sometimes family members are required to work beyond a 9-to-5 job. They might also have to assume more difficult tasks or higher-level responsibilities. Make sure these details are also reflected in the employment agreement since it may support higher pay.

And you must pay the family member a salary and he must do work related to running the business. “The salary has to be reasonable in the circumstances — fair market value, or what you’d pay someone not related to do the job,” says Goodfield.

Tax assessors look closely at salaries paid to family members. For instance, CRA might investigate whether a spouse on the books ever steps in the office. Or it might interview a 16-year-old child to confirm what work he does at dad’s office. The duties must justify the wages.

Who can help

Your accountant can advise you on the employment arrangements and salaries that are tax-beneficial and increase your bottom line. To determine fair market value for a position, talk to other employers or HR managers. Certain work can justify the higher end of a salary range (e.g., work that requires a specialized skill).

Stuart Foxman is a freelance financial writer.

This post was updated July, 14 2016.