How do I issue my minor child a w-2 and take the deduction on turbotax self employed? Aren't they exempt from SS and medicare under 18 working for sole proprietor parent.

[ddonaldson-home]

Is it true that money paid to minor children is exempt from withholdings if less than $12,000?

Is it true that I can issue a w-2 to my minor child as a sole proprietor under my SSN?

I would like to expense these payments and issue a W-2.

[MinhT · Accepted solution]

Yes, minor children employed by their parents are exempt from SS and Medicare tax.

There is no tax due if wages are less than $12,000. But you still have to withhold tax according to the IRS withholding tables.

Yes, you can issue a w-2 under your SSN. However, W-2s had to be filed with the Social Security Administration by January 31, 2019. And you must have paid the wages in 2018 to deduct them.

Please see this IRS document for more information:

https://www.irs.gov/businesses/small-businesses-self-employed/family-help

[TaxSaveHelper]

Why does the Turbotax not allow to create W-2 using SSN when Sole proprietor don't need EIN because only employee is the kid? Here you said, I should be able to issue W-2 to my Kid using my SSN. That is not happening with the Turbo tax software. Can you help, How do I create W-2 now?

[Opus 17]

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@TaxSaveHelper wrote:

Why does the Turbotax not allow to create W-2 using SSN when Sole proprietor don't need EIN because only employee is the kid? Here you said, I should be able to issue W-2 to my Kid using my SSN. That is not happening with the Turbo tax software. Can you help, How do I create W-2 now?

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Just get an EIN, it take 15 minutes and it also saves you giving your personal SSN to your clients and vendors.

https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-n...

As far as I know, the rule is you must have an EIN if you pay employees.  There is not an exception that I know of for if your employees are exempt from payroll tax withholding. 

[Critter-3]

Sorry but you DO need an EIN if you have payroll ... a W-2/W-3 cannot be filed without one.

They are easy and free to get :  https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-n...

[DoninGA]

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@TaxSaveHelper wrote:

Why does the Turbotax not allow to create W-2 using SSN when Sole proprietor don't need EIN because only employee is the kid? Here you said, I should be able to issue W-2 to my Kid using my SSN. That is not happening with the Turbo tax software. Can you help, How do I create W-2 now?

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See this TurboTax support FAQ for using Quick Employer Forms - https://ttlc.intuit.com/community/forms/help/what-is-quick-employer-forms/00/25916

QEF for tax year 2020 should be available on November 23, 2020

[TaxSaveHelper]

Do I need to worry about creating W-2 for Kid?

According to Mark J Kohler, I don't need to issue W-2. That means I don't need to have EIN.

https://youtu.be/ZVyqDK4pkc8

Can you please confirm?

[Critter-3]

Did you  not hear him  use the word Payroll several times ?  That means you must complete and file payroll tax forms timely and issue a W-2 at the end of the year.   Please seek local professional guidance in payroll matters so you do it right.  To take the deduction on the Sch C as payroll the IRS must have payroll reports to back it up.

[TaxSaveHelper]

Please review the Video again.

At 2:29 Three way to pull this off (RULES <18 yrs old, OUTSIDE LABOR Payment, etc.)

According to him Don't issue W-2 or 1099. This is the point.

Do you guys agree with this CPA?

Critter-3, I am sorry, I am Turbo tax user and want to avoid taking my tax need to external people when I have simple business and Standard deduction with Schedule C. I have Simple business. I try to keep it simple and don't want to create complexity. There are so many opinions from each CPA. I don't know whom to trust. I trust Intuit to help me and I am happy to buy any software that can help me and back there words.

[Opus 17]

Why do you NOT want to issue a W-2?

You must issue a W-2 if the income is subject to federal or state withholding.  Federal income tax withholding would kick in at annual wages of $12,400 for 2020 and $12,550 for 2021, but what about state withholding?  You will need to check your own state laws and requirements.

But why do you not want to issue a W-2?  You're trying to turn $12,000 of taxable business income into tax-free money for your kid.  If audited, you will need to be able to prove to the IRS that your child performed legitimate work and you paid a fair market wage that was not bogus or inflated.  Filing a W-2 and forms 941/944 may help you prove this to the IRS.

See this for more

https://www.kitces.com/blog/tax-rules-hiring-children-family-business-flsa-tax-savings-standard-dedu...

[Critter-3]

Ok ... don't know what is so difficult ... EIN free from IRS and W-2/W-3 free with the Quick Employers forms in the TT program ... so if you want the deduction do the proper  paper trail. 

[TaxSaveHelper]

I don't have problem issue W-2. My only concern is that Mark J Kohler is saying DON'T issue W-2 and 1099, That can cause problems with IRS. I am confuse with different answers from different CPA. 

[Critter-3]

Let us put it this way ... issuing a W-2 is the best way to CYA method that you can use   for supporting   your deduction AND for the kids return especially if they will use this income to make IRA contributions.  It will NOT mess up anything with the IRS if you file payroll tax returns.  

[Opus 17]

I have not watched the video, because I’m not going to give the man clicks. The notes to the video make him sound like a common huckster.  The comments are frankly alarming, several people who are clearly going to just throw money at their children without having them perform legitimate work, and one person who wants to figure out how to give earned income to a baby so that he can open a Roth IRA for the baby!

The most important thing about employing your child is that the child must perform legitimate work for your business, and must be paid a fair market wage for that work. You must also follow all applicable state and federal labor laws including child labor laws.  (Some of those laws may have exceptions for hiring your own children in certain jobs, but you must make yourself aware of those laws and what those exceptions might be in your state.)

The theory in the video seems to be that issuing your child a W-2 will bring attention to you at the IRS and may result in an audit. And so the person making the video is suggesting filing no paperwork so as to keep under the radar.  But if you are employing your child to perform legitimate work at a fair market wage, you would have nothing to fear from an audit and filing the correct paperwork will only strengthen your case.

You must issue a W-2 if you are paying enough that you trigger a requirement to withhold state or federal income tax, even if you are not required to withhold employment taxes.  If you pay less than that, then failing to file the W-2 is not technically illegal. 

[TaxSaveHelper]

Simple scenario:

I have W-2 earning.

My wife has small business where Teen kids are also helping. Business earns 40K to 60K net after all expenses (except kids payment)..

I want to minimize the paper works, So trying to keep it Sole proprietorship using the my wife's SSN.

Keeping track of all the work done by kids in Excel sheet. 

Paying them on their checking account as per hours spend by kids. Making sure kids will earn max 12K standard deduction limit. This should help me reduce 24K taxable income.

Not issuing the W-2 and claiming them as dependent. Kids not required to file tax because earning is less then standard deduction.

As Sole proprietor and kids working in family business, we claim the amount paid to kids in Schedule C.

Is the above process valid from rules perspective?