Best way to pay my child dependent from LLC

[bdoubleu]

I saw a similar question, but circumstances are slightly different.

I have a single member LLC I started in 2021. When I started it, it was my intent to pay my then 17 year old through a 1099 for 2021. He turned 18 the last week of December 2021 and I plan on adding him on as a partner or signing the LLC over to him in 2022. So 2021. I start to do my business taxes in TT Home and Business. and I get to "did you pay any employees including family members" and it says the following:

"If your child works in your business and makes less than $12,550 a year, he/she doesn't pay income taxes (unless the child has income from investments).

So there is a benefit to hiring your kids if they are truly employees, and are actually working in the business.

If your child makes more than $12,550 a year, he/she pays taxes but typically at a much lower rate than you do. If your child is under 18, you don't have to withhold or pay Social Security or Medicare taxes on his/her income. If your child is under 21, you don't have to pay federal unemployment taxes either."

He made about $5500 last year. But he turned 18 in the tax year. I plan on claiming him as a dependent as he will be going to college for the next 3-4 years. To the questions:

Should I pay him as a contractor as planned (again he turned 18 during the calendar year)? Or is it best to pay him on a W2 so he pays less taxes? I mean that's why we are all here. Or since he turned 18, is his tax burden the same. Since I was planning on paying him on a 1099, I didn't do any withholding of course. So didn't pay anything. And I knew his income level would be low and wasn't worried about him paying it when he files. Do I have to pay FICA if pay him on a W2 since he turned 18 before the year was out? 

I'd like to create the W2 or 1099 this week to start his personal taxes. and I don't want to have to go back and try to redo it.

[ColeenD3]

You are correct that with a salary of $5,500, he is not required to file a return. When he was 17 he was not required to pay SE taxes, but he did turn 18 during 2021, so for that portion of the year, he is liable.

Children employed by their parents

If the business is a parent’s sole proprietorship or a partnership in which each partner is a parent of the child:

• Payments for the services of a child are subject to income tax withholding regardless of age.
• Payments for the services of a child under age 18 are not subject to social security and Medicare taxes.  If the child is 18 years or older, then payments for the services of a child are subject to social security and Medicare taxes. 
• Payments for the services of a child under age 21 are not subject to Federal Unemployment Tax Act (FUTA) tax.  If the child is 21 years or older, then payments for the services of a child are subject to FUTA taxes

Employees are paid with a W-2. It isn't a choice made by the business owner. If a worker meets the criteria of an employee, he can't be paid with a 1099-NEC.

Common Law Rules

Facts that provide evidence of the degree of control and independence fall into three categories:

1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

[bdoubleu]

Thank you for the response. of the 3 common law rules, the only one that jumps out is the company provided tools. The remainder of the items listed wouldn't apply. So I could still go either way with 1099 or W2 (based on my limited knowledge).

He turned 18 with 3 days left in the year. His last payment was December 7th or thereabout. So If I do a 1099 he shouldn't have to pay SE or FICA on anything he made last year. Shouldn't have to pay any federal taxes either since his income was so low. I believe the same applies even if I show him paid on a W2. so no matter which way I go, his tax burden is the same and so is mine from a business perspective. That said to me it boils down to the common law rules you posted. Which with me providing the tools only, I feel like I could go either way.

So. I really appreciate the help. If you could confirm how I'm interpreting this is correct (or not)? And if you have any last minute guidance or which way I should go for any particular benefit (or if me providing tools is a hardline W2 stance, I feel soft on that...but I really have no idea)?

Thanks again.

[Vanessa A]

Do you control his schedule or does he work when he wants? Does he offer those services to others? Is what he does critical to your company?  Could your company run without the work he does? Do you control what and how he does his job or does he decide how and what he does?  

Example, if he is doing maintenance and landscaping on your premises does he do it when he has time and when a problem arises or do you expect him to be there from 4PM-7PM waiting for a problem and keeping busy?  If he does it when he has time, then he could easily be an independent contractor.  If you expect him to be there from 4PM-7PM on certain days, then he is likely an employee. 

It really comes down to how much control you have over his work and how crucial his part in the business is to the success.  

I am assuming, as your child, any benefits provided are as a parent, not as an employer, however, if you are providing them as an employer, that would make him an employee. 

[bdoubleu]

He sets his own schedule. The customers call and interface with him directly and he determines when he can and will work. He has 100% autonomy over his schedule, the work he does, and how he does it. There are no benefits. The only thing that really would apply is that I supply the equipment/tools.

As mentioned before. I don't think his tax burden changes at all whether I give him a W2 or 1099. because he turned 18 yrs old 3 days before the year ended and his last payment was around Dec 7th. He wouldn't owe SE, FICA or federal taxes. So I do believe I could go either way with it. The question still remains, which way is best? and am I interpreting it correctly?

[ColeenD3]

Again, it is not a choice. If he fits the criteria of an employee, he gets a W-2. If not, he gets a 1099-NEC. Seeing as how you have not made any payroll tax payments and that apparently he has more control over his work situation than you do, he appears to be an Independent Contractor. Issue him a 1099-NEC.

If you are asking which is the best way to go for information only, it works out better for you to have an Independent Contractor since it saves you money on SE taxes. It works out better for the person you hire to be an employee since the entire tax liability is not put on him.