Hiring a senior household or office lead: payroll, classification, and what the books need

When a household or a family office hires its first senior person, such as a chief financial officer, a controller, or a lead administrator, most of the attention goes to the search and the interview. The tax side gets settled in a hurry after the offer is accepted, and that is when the mistakes happen. The person is paid through the wrong entity, treated as a contractor when they are an employee, given a bonus structure nobody has checked against the deferred compensation rules, or set up in a state where the employer has no payroll account. Each of these lands on a return.

This post covers the payroll, worker classification, and bookkeeping questions to settle before a senior hire starts. It is not hiring advice, it does not cover how to find or evaluate a candidate, and it is not employment law advice. It is the list your preparer and payroll provider need answered.

Question one: who is the employer?

Decide which legal entity employs the person. Options include an office LLC or corporation, an operating business, a trust, or an individual family member. The choice controls:

• Which EIN files Forms 941 and 940 and issues the W-2.
• Which entity deducts the wages, and whether those wages are deductible there. Wages for managing an operating business are deductible by that business. Wages for managing personal investments are generally not deductible by individuals in 2026, because Section 212 expenses are no longer allowed as itemized deductions.
• Which state payroll accounts are needed.
• Who is liable if payroll taxes are not paid. Responsible persons can be personally liable for unpaid withheld taxes under the trust fund recovery penalty, IRC Section 6672.

If the person will work for more than one entity, consider whether one entity employs them and bills the others under a written cost allocation, or whether the arrangement needs a common paymaster. That is a question for your preparer and counsel together.

Question two: employee or contractor?

A senior person who works set hours, uses the family's systems, reports to the family, and has no other clients is almost always an employee under the common-law control test the IRS applies. Calling them a consultant and issuing a 1099-NEC does not change that. Misclassification exposes the payer to back employment taxes, penalties, and interest, plus state unemployment and workers' compensation issues.

The IRS looks at behavioral control, financial control, and the relationship of the parties. Form SS-8 lets either party ask the IRS for a determination. The Voluntary Classification Settlement Program allows a payer to reclassify workers going forward with reduced liability for past years, if eligibility requirements are met. Some states, such as California with its ABC test, apply stricter rules than the federal test.

If the person truly is a contractor with their own firm and other clients, collect a Form W-9 before the first payment. For payments made in 2026, a 1099-NEC is required at $2,000 or more.

Question three: how is the person paid?

Salary and payroll taxes

For 2026, Social Security tax is 6.2% each for employer and employee on wages up to $184,500. Medicare is 1.45% each on all wages, plus 0.9% Additional Medicare Tax withheld from the employee's wages over $200,000. Federal unemployment tax applies to the first $7,000 of wages. State unemployment, disability, and paid leave programs vary.

Bonuses

Bonuses are supplemental wages. Federal income tax withholding on supplemental wages is generally a flat 22%, rising to the top rate of 37% on supplemental wages over $1,000,000 in a year. Bonuses paid within two and a half months after the end of the year in which they are earned are generally short-term deferrals, outside the deferred compensation rules.

Deferred and long-term incentives

Any promise to pay compensation in a later year, such as a retention bonus payable in three years, a phantom equity plan, or a share of investment gains, may be nonqualified deferred compensation under IRC Section 409A. A plan that fails 409A's documentation and timing rules can make the deferred amount taxable when vested, plus a 20% additional tax and interest for the employee. Any long-term incentive needs written plan terms reviewed by counsel before the offer.

Profits interests

Some family offices compensate senior staff with a profits interest in an office partnership. Rev. Proc. 93-27 and 2001-43 describe when receipt of a profits interest is not taxed. Gains allocated to the interest may be subject to the three-year holding period of IRC Section 1061. These structures belong to tax counsel. The preparer needs the partnership agreement to report K-1s correctly.

Question four: what benefits, and through which plan?

Benefits follow the employer. A retirement plan sponsored by the employing entity has 2026 limits of $24,500 for 401(k) deferrals and $72,000 for total contributions to a defined contribution plan, before catch-ups. If the entity has other employees, coverage and nondiscrimination rules apply. Health coverage, life insurance, and other fringe benefits each have their own rules. Reimbursing personal expenses requires an accountable plan, or the reimbursements are wages.

Question five: what do the books need?

• An employer EIN and state payroll accounts in place before the first paycheck.
• Form I-9 and Form W-4 from the employee, and the state withholding form where required.
• A payroll provider or a documented internal process, with deposits made on the schedule the IRS assigns (monthly or semiweekly).
• A written offer letter and any plan documents for bonuses or incentives.
• A cost allocation if the person's work is billed to several entities.
• A record of the person's work location, for state withholding. A remote employee in another state usually means a payroll account in that state.

The scored diagnostic

Score each item 0, 1, or 2. Zero means missing. One means partial or out of date. Two means current and documented.

Item	0, 1, or 2
The employing entity is chosen, with EIN and payroll accounts
Classification as employee or contractor is documented
Wages are deductible by the entity that pays them, or the limit is known
Cost allocation is written for work across entities
Bonus terms are written and checked for short-term deferral timing
Any long-term incentive reviewed by counsel for 409A
Benefits plans are sponsored by the employer of record
Work location and state payroll registration are set
Payroll deposit schedule and responsible person are named

A total of 15 to 18 means the hire is ready to start. A total of 9 to 14 means fix the gaps before the first paycheck. Below 9, delay the start date.

Illustrative: a controller paid as a consultant

Illustrative: A family hires a controller at $220,000 a year to manage bookkeeping for three rental LLCs, the parents' personal bills, and a trust. To keep it simple, they pay her monthly from the parents' personal account and plan to issue a 1099-NEC. She works full time, on their schedule, using their systems, and has no other clients.

From a preparer's view, she is an employee. The parents, as payer, would owe employer payroll taxes, and the work for personal bills is not deductible to them. A cleaner arrangement, which counsel and the preparer would design, might be employment by one entity with a written allocation of her cost to each rental LLC and the trust, and a charge to the parents for personal work. The rental share then becomes deductible on Schedule E, and payroll filings run from one EIN.

When the hire leaves

Plan the exit on the way in. When a senior person leaves, the employer issues a final paycheck under state timing rules, a W-2 after year end, and possibly a final Form 941 if the entity has no other employees. Any deferred pay follows the plan's terms. Revoke the person's Forms 8821 or 2848, remove access to IRS, EFTPS, payroll, and bank accounts, and collect the records list they were keeping.

Who owns what

The family chooses the person and the role. Employment counsel drafts the offer and any incentive plan. The preparer and payroll provider set up the employer, payroll, classification documentation, and allocation. The document checklist post lists what to send at year end.

Next step: before any offer goes out, write down the employing entity, the work state, and the pay structure, and send it to your preparer for a payroll check.

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Educational only. This is not tax or legal advice for your situation. Consult your own CPA, EA, or attorney before acting.