I owned around 700 US dollar for 1 lunar year. Now as far as I know, I am obliged to pay the zakat for this 700 dollar which is 2.5% of the amount. Now how should I divide this money for the zakat? Should I pay my full zakat amount to a needy person in my family? Basically paying one person the whole amount of the zakat? Or should I divide it in equal parts and pay to different category of people. Like some part for the poor outside my family, some for the poor inside my family etc. Please help me on this confusion in the light of quran and authentic hadith.
Allah the almighty thought as the order in which we should pay zakat (or consider the recipients):
Zakah expenditures are only for the poor and for the needy and for those employed to collect [zakah] and for bringing hearts together [for Islam] and for freeing captives [or slaves] and for those in debt and for the cause of Allah and for the [stranded] traveler - an obligation [imposed] by Allah . And Allah is Knowing and Wise. (9:60)
these are the categories and you should try to chose among those of the first too the poor and needy in first place. As for how to divide it is hard to give you an advice. As you may know the person or people you have in mind better maybe a good hint is to give it a person that might not use it for something bad.
There's no fixed obligation or ruling on whether one should give all his zakat to one person or divide it between many people nor on how to divide it
Ibn Taymiyah even said it is not necessary -in case of division- to pay it equally but rather based on the need of the person which may receive it.
If the amount is large it seems to me rather better to divide it while if it is small it doesn't seem to be of help dividing it. But Allah knows best!
There are a few ahadith which seem to recommend paying it for the closest people:
... Well done! that is a profitable deal, that is a profitable deal. I have heard what you have said, but I think you should spend it on your nearest relatives. So Abu Talha distributed it among the nearest relatives and his cousins on his father's side.
(Please refer to the full hadith in Sahih Muslim)
... The Prophet said, "Yes, (it is sufficient for her) and she will receive a double rewards (for that): One for helping relatives, and the other for giving Zakat."
(Please refer to the full hadith in Sahih al-Bukhari)
Giving charity to a poor person is charity, and (giving) to a relative is two things, charity and upholding the ties of kinship. (See for example in Sunan an-Nasa-i)
So it is recommended to pay zakat to the poor or needy and close person first. Nevertheless if paid to any other poor or needy person it is still fine. Maybe among the reasons to consider is more recommended is that your relatives know you and your wealth and may envy you for that and that is sinful. By helping them you will get rewarded and may keep them away from sinful acts and uphold the ties of kinship.
So you may pay your whole zakat to one person, if this person is a relative you would even be double rewarded.
You may also divide it between relatives and relatives and non-relatives, here you should chose to divide it equally or give more based on the need of the person.
It is all up to you note that you may be rewarded in any case as long as you do this with a pure intention.
But note that some people shouldn't receive Zakat even if they might actually be in need, like a person who is able to work but doesn't seek for a job:
two men told him, that they came to the Messenger of Allah asking him for charity. He looked from one to the other and he saw that they were strong. The Messenger of Allah said: "If you want, I will give you, but no rich man or one who is strong and able to earn has a share of it." (Sunan an-Nasa-i and Sunan abi Dawod)
'It is not permissible to give charity to a rich man (or one who is independent of means) or to one who is strong and healthy."' (See for example in Sunan an-Nasa-i, Sunan ibn Majah and Jami' at-Tirmidhi)
See also islamqa #27021