@jessicasote
Unfortunately, @ToddL99 @‘s answer is incomplete.
First of all, the question of whether a child is an employee or an independent contractor is judged on the same factors as an unrelated person. They are an employee or an independent contractor based on the relationship between the worker and the business, and the level of control exerted by the business over the worker, their working conditions, hours, and so forth. Here is one of the IRS webpages that discusses this issue.
https://www.irs.gov/newsroom/understanding-employee-vs-contractor-designation
Then, if the business is a sole proprietorship or LLC reported on schedule C as a disregarded entity, and if the child is an employee (and under age 18), the parent is not required to withhold or pay Social Security and Medicare tax. They are required to issue a W-2. They may have other responsibilities under state law, relating to the number of hours a child may work and limitations on a child’s working conditions. They may be required to follow any number of other state labor laws that apply to all employees. Whether there are exceptions to certain labor laws for the employer‘s own child is something that would have to be researched in each state.
If the child is an independent contractor, the parent would issue a 1099-NEC and the child would report a schedule C on their own tax return, including paying self-employment tax.
Financially, because a parent is not required to pay Social Security tax for their child under age 18 as their employee, the child will pay more tax if they are categorized as an independent contractor. However, the real test is based on the relationship between the worker and the employer, and I am not aware of any special rules that apply to children as opposed to unrelated adults. If an unrelated worker doing the same job would be classified as an independent contractor, then that would also be appropriate for the child. If an unrelated worker would be classified as an employee and would have certain rights and obligations under state law, that would apply to the child as well.
