The IRS does scrutinize wages paid to children. If they ever audit your returns, they will want to see proper payroll forms filed, time-sheets, and documentation of the services that your children provided in your business. The IRS will want you to prove that a bona fide employee relationship exists.
If you hired your children as employees, you need to issue them W-2s. The 16 year old is not subject to social security and medicare tax as your employee, so the W-2 will only show Federal wages. However, the 21 year old is subject the social security and Medicare tax. Neither child is subject to Federal unemployment tax. You need to provide a W-2 to the 16 year old that you do not need to send to the IRS (since there are no taxes). The 1099-MISC is most likely not the correct form for the 21 year old (Form 1099-MISC will be treated as self-employment income by the IRS) if the 21 year old is your employee this year, make sure you are withholding and paying social security on their income and filing payroll tax forms 941 or 944.
