Do I Have to Give My Child a W-2?
Explore the tax implications of hiring your child. This guide clarifies IRS requirements for family employment, ensuring proper reporting for both parent and child.
When parents employ their children, whether in a family business or for household tasks, navigating the associated tax obligations presents unique considerations. This arrangement involves specific tax implications for both the parent, as an employer, and the child, as an income earner. Understanding these tax rules is important to ensure compliance and manage financial responsibilities for both parties.
Determining if a W-2 is Needed
Whether a W-2 form is necessary for a child employee depends on the work relationship and wages paid. The Internal Revenue Service (IRS) distinguishes between an “employee” and an “independent contractor” based on factors like control over work and financial independence. An employer-employee relationship exists when the business controls what work is done and how, while an independent contractor typically controls their own work.
If a child is an employee, a W-2 is generally required if their wages exceed certain thresholds. For federal income tax withholding, if the child’s income is below their standard deduction for dependents (earned income plus $450, up to $14,600 for 2024), no withholding is typically necessary. However, if federal income tax was withheld, or if wages exceed this deduction, a W-2 is generally issued for reporting.
A W-2 is always required if the business is a corporation, or a partnership that includes partners other than the child’s parents. General employee wage reporting rules apply in these scenarios. Conversely, a W-2 is not issued if the child is an independent contractor; a Form 1099-NEC might be applicable if payments exceed $600, or no form if payments are below this threshold.
Social Security and Medicare Tax Rules
Social Security and Medicare taxes, known as FICA taxes, include both employer and employee portions typically withheld from wages. However, specific exemptions apply when a parent employs their child, depending on the business structure and the child’s age. These exemptions can provide relief from payroll tax obligations.
Wages paid to a child under 18 are exempt from Social Security and Medicare taxes if the business is a sole proprietorship or a partnership where the parents are the only partners. This exemption means neither the employer nor the employee portion of FICA taxes needs to be paid or withheld.
The FICA tax exemption also extends to wages paid to a child aged 18, 19, or 20, provided the business remains a sole proprietorship or a partnership consisting exclusively of the child’s parents. The child’s age at the time wages are paid is the determining factor for the exemption.
These FICA exemptions do not apply if the business is structured as a corporation. Corporations, even those wholly owned by parents employing their children, are subject to standard FICA tax rules. Similarly, if the business is a partnership that includes partners other than the child’s parents, or if the child is employed by an estate or trust, standard payroll tax obligations apply.
Federal Unemployment Tax Rules
Federal Unemployment Tax Act (FUTA) taxes are employer-paid taxes that fund unemployment compensation programs. This tax typically applies to employee wages, but like FICA taxes, specific exemptions exist for family employment, which can reduce the tax burden on a parent employing their child.
Wages paid to a child under 21 are exempt from FUTA tax if the business is a sole proprietorship or a partnership where the parents are the only partners. This means the employer is not required to pay FUTA tax on the child’s wages, as long as the child has not reached their 21st birthday by year-end.
This FUTA exemption is specific to the business structure and the direct parent-child employment relationship. It does not apply if the business is a corporation. Similarly, if the business is a partnership that includes any partners other than the child’s parents, or if the child is employed by an estate or trust, the employer must pay FUTA tax on the child’s wages.
How the Child Reports Income
Regardless of whether a W-2 was issued, all earned income, including wages from family employment, is generally taxable to the child. The child is responsible for reporting this income on their own tax return, which becomes necessary when certain income thresholds are met.
A child needs to file a federal income tax return if their gross income exceeds the standard deduction for dependents. For 2024, this threshold is the greater of $1,300 or their earned income plus $450, up to $14,600. A return is also required if federal income tax was withheld, or if unearned income (such as interest or dividends) exceeds specific thresholds.
If a W-2 was issued by the parent employer, the child uses the information provided on that form to complete their Form 1040. The W-2 reports the wages earned and any taxes withheld, simplifying the child’s tax filing process.
If the child was an independent contractor and received payments, they report this income as self-employment income on Schedule C (Form 1040). If net earnings from self-employment exceed $400, the child will owe self-employment taxes, which cover Social Security and Medicare contributions. This obligation exists even if no formal tax forms were issued.