Deductions & credits

Your child was subject to income tax withholding as an employee, if you are a sole-proprietorship or both-parent partnership, regardless of age.  There is no up to $12,000 deduction allowance.  Therefore, you had to issue a W2 to your child and the amount in box 1 of the W2 is deductible as Wages.

Per the IRS:

Child employed by parents.

Payments for the services of a child under age 18 who works for their parent in a trade or business aren't subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child. If these payments are for work other than in a trade or business, such as domestic work in the parent's private home, they’re not subject to social security and Medicare taxes until the child reaches age 21. However, see Covered services of a child or spouse, later. Payments for the services of a child under age 21 who works for their parent, whether or not in a trade or business, aren't subject to FUTA tax. Payments for the services of a child of any age who works for their parent are generally subject to income tax withholding unless the payments are for domestic work in the parent's home, or unless the payments are for work other than in a trade or business and are less than $50 in the quarter or the child isn't regularly employed to do such work.

Covered services of a child or spouse.

The wages for the services of a child or spouse are subject to income tax withholding as well as social security, Medicare, and FUTA taxes if they work for:

A corporation, even if it is controlled by the child's parent or the individual's spouse;

A partnership, even if the child's parent is a partner, unless each partner is a parent of the child;

A partnership, even if the individual's spouse is a partner; or

An estate, even if it is the estate of a deceased parent.

In these situations, the child or spouse is considered to work for the corporation, partnership, or estate, not you.

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