Yes, you can issue a W-2 to your children. And yes, you deduct the wages you pay your children as a business expense on your Schedule C.
You can obtain a copy of a W-2 from the IRS website. If you would rather file the forms electronically, you must create an account through the Social Security Administration website, which allows you to create and submit Form W-2 online. To create an account and begin using the online form, refer to the Social Security Administration – Business Online Services website. You can also mail the W-2 to the Department of the Treasury, Internal Revenue Service.
Regarding whether your children need to file a tax return depends on whether you claim them as a dependent or not. If claimed as a dependent, according to the IRS, their standard deduction is as follows:
- Dependents – If you can be claimed as a dependent by another taxpayer, your standard deduction for 2021 is limited to the greater of: (1) $1,100, or (2) your earned income plus $350 (but the total can't be more than the basic standard deduction for your filing status).
Even if your children do not need to file a return, if you made tax withholding on their behalf, of if your children made estimated tax payments, they will need to file a return to receive a refund of their tax withholding.
Whether your children are your employees or independent contractors is a factual issue. Generally, if you control what is done and how it is done, then your children are likely to be your employees.
Regarding whether to document your payments through a W-2, a notebook entry, or some other form of documentation is a request for advice beyond which we can provide. However, a W-2 does get filed with the IRS, as do Forms 1099-Misc and 1099-NEC, and given that fact, documents of this type may have greater evidentiary weight.
@Nat40
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