@ocramolop wrote:
What if the person providing child care is one of my children and that child also performs other business functions for the sole proprietorship, such as office work, marketing, etc. Can all her work be wrapped into her W-2, including the child care portion?
This is where we have to say "see a tax advisor."
A business can provide on-site child care for employees. The care provider can be an employee of the business. Even though the business might be manufacturing cars (for example), providing child care can be an ordinary and necessary business expense because it allows employees with children to get on with the actual business of making cars. So that by itself, is not a reason to say that Jane Smith has to get two different pay checks if they spend half their time performing direct duties for the company and half their time performing child care so that other employees can work.
However, there are special tax rules for work-provided child care, whether or not the value of the childcare must be included as part of the employee's wages. And someone who is more than a 2% owner of the company can't use the ordinary rules, they have to use special rules to account for the value of that child care in their wages. I'm not convinced it would be wrong to pay the child for on-site childcare to allow you to run the business (because other businesses do it), but it's hinky to me because you are the owner and the employee is your child. .
Put another way, if you had an employee John who was unrelated to you, and John told you he had to quit because of childcare issues, and you offered to hire an unrelated person Tom to provide childcare for John's children because John is such a valuable employee, I think that would be allowed, and Tom would be an ordinary employee of the business providing an ordinary and necessary service to the business, even though you would have some tax issues to work out to account for the value of the childcare on John's W-2. However, because you are the owner, and the proposed provider is your child, that throws the whole arrangement into question.
On top of that, if the care provider is your child under age 18 and you pay them personally, you don't have to withhold or collect household employer's tax (social security and medicare). And you don't have to pay FUTA if they are under 21. But if they are an employee of the S-corp, then you must withhold social security and medicare tax on all their wages and the corp must pay the matching half of the tax plus FUTA. So hiring the child under the corp is more expensive to you and the child, if the child is under 21).
I would pay the child under the S-corp for S-corp related work and I would pay them as a household employee for the childcare. For any other arrangement, I recommend professional advice.
https://www.irs.gov/businesses/small-businesses-self-employed/family-help
https://www.irs.gov/businesses/small-businesses-self-employed/hiring-household-employees
