Before addressing your specific questions, and because you mentioned that you and your wife have a Schedule C rental business, if spouses carry on a business together and share in the profits and losses, they may be partners whether or not they have a formal partnership agreement. If so, the IRS recommends that they should report income or loss from the business on Form 1065. They should not report the income on a Schedule C (Form 1040) in the name of one spouse as a sole proprietor. But, the spouses can elect not to treat the joint venture as a partnership by making a qualified joint venture election.
If you are interested in learning more about a qualified joint venture agreement, here is a link to an IRS webpage that discusses this subject.
You are correct in that you need to withhold Social Security and Medicare taxes for the children 18 and older. Payments to a child under age 21 aren't subject to FUTA (Federal Unemployment Tax). Payments are subject to income tax withholding, regardless of the child's age.
Regarding what to do now, you need to file Form 941, Employer's QUARTERLY Federal Tax Return. However, TurboTax does not support Form 941. Therefore, you will need to print out Form 941 and prepare it manually, or you can e-file Form 941 as per IRS guidelines. While e-filing is more efficient, there is a cost involved with e-filing. Here is a link to the IRS webpage that discusses how to e-file Form 941. The Where Should You File information is near the bottom of the page. Also included is the address information.
You are correct in that there is a penalty for late filing of Form 941. The late deposit penalty ranges from 2% to 15% depending on the length of time the deposit is late. Generally, unless you're eligible to pay taxes with your return, you should have deposited your taxes and shouldn't have a balance due with Form 941. If you pay taxes with your tax return that should have been deposited, you may be subject to a penalty.
You can use the Tax Withholding Estimator to help in calculating how much tax to withhold from your children's pay. Here is a link to the IRS tax withholding estimator.
The federal income tax withheld and social security and Medicare taxes are added together on Form 941. The resulting net tax after credits and adjustments is the amount of employment taxes you owe for the quarter (Form 941).
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