How to Issue a W-2 When You Employ Your Child

Employing your child in a family business is a legitimate employment situation, not just an allowance. This formal relationship requires adherence to tax regulations and proper documentation, including issuing a Form W-2. Following these rules ensures compliance with federal and state laws.

Prerequisites for Legitimate Employment

For the employment of a child to be recognized by the IRS, the arrangement must be a genuine employment relationship. The work performed must be ordinary and necessary for the business. Tasks should be common and appropriate, such as cleaning an office or managing social media, not personal chores. The compensation paid must also be reasonable and comparable to what you would pay a non-relative for similar services.

Maintaining clear records is important for proving the legitimacy of the employment. This includes documenting the hours your child worked and the tasks they performed. An employment contract that outlines job duties and paying wages via check or direct deposit also creates a clear financial trail.

The tax implications of hiring your child depend on your business structure. If you operate as a sole proprietorship or a partnership where you and your spouse are the only partners, payments to your child under age 18 are not subject to Social Security and Medicare (FICA) taxes. Wages paid to your child under age 21 are also exempt from Federal Unemployment Tax Act (FUTA) taxes.

If your business is a corporation or a partnership that includes non-parent partners, these exemptions do not apply. You must withhold FICA taxes and pay FUTA taxes on your child’s wages, regardless of their age, just as you would for any other employee. All wages paid for business-related work are subject to federal income tax withholding, irrespective of the business entity type.

Information and Forms Needed to Prepare the W-2

Before preparing a Form W-2, your business must have a federal Employer Identification Number (EIN). An EIN is a unique nine-digit number the IRS uses to identify a business for tax purposes. You cannot use your personal Social Security Number to report employee wages, so you must apply for an EIN if you do not have one.

Upon hiring, your child must complete the same paperwork as any other new employee. This includes Form I-9, Employment Eligibility Verification, which is used to verify the identity and employment authorization of individuals hired for employment in the United States. You and your child must complete this form, and you must retain it in your records; it is not filed with any government agency. The form requires the employee to present acceptable documents proving their identity and work authorization.

Your child must also complete Form W-4, Employee’s Withholding Certificate. This form tells you how much federal income tax to withhold from your child’s paychecks. Your child will need to provide their name, address, Social Security number, and filing status, and can also indicate dependents or other adjustments. It is important to keep the completed Form W-4 on file for your records.

With the necessary information gathered, you can prepare Form W-2, Wage and Tax Statement. These forms can be ordered from the IRS or purchased at office supply stores. Boxes on the form include Box 1 for total wages, Box 2 for federal income tax withheld, Box 3 for Social Security wages, and Box 5 for Medicare wages.

The W-2 Filing and Furnishing Process

After completing the Form W-2, you must also prepare Form W-3, Transmittal of Wage and Tax Statements. This form is a summary sheet, and the totals on it must match the sum of the amounts from all accompanying W-2s. This transmittal form is required only when you file paper copies with the Social Security Administration (SSA).

You have two methods for filing with the SSA: mail or electronic submission. If filing by mail, you must send the official, red-ink scannable Copy A of Form W-2 along with Form W-3. Using photocopies or other non-official versions will result in processing delays and potential penalties.

You can also file electronically using the SSA’s Business Services Online (BSO) portal, which is often a more efficient method. The BSO system allows you to key in W-2 data directly or upload a properly formatted file. When filing electronically, you do not need to submit a separate Form W-3, as the system automatically creates the summary totals.

In addition to filing with the government, you must furnish copies of the Form W-2 to your child. You must provide them with Copy B for their federal income tax return, Copy C for their personal records, and Copy 2 for their state tax return.

You must file the W-2s with the SSA and furnish the copies to your child by January 31 of the year following the tax year. Most states also have a separate W-2 filing requirement. You should consult your state’s tax agency for their specific deadlines and procedures, which often coincide with the federal deadline.