I think this is how this works. I have three options (please confirm if my understanding is correct).
1) I pay $5500 to my child. I show that as a business expense. She does not file a tax return.
2) I pay $5500 to my child. I show that as a business expense. She files a tax return and does not end up paying any tax because she claims personal exemption etc. But then I cannot claim her personal exemption on my return.
3)I pay $5500 to my child. I show that as a business expense. She files a tax return and does not end up paying any tax because she claims personal exemption etc. I ALSO claim her personal exemption on my return.
Which option is correct?
Actually #1 is correct. She does not file a tax return because the filing threshold for a dependent, with earned income, is $6350 (2017) ($12,200 in 2019). She can still be your dependent.
You must issue her a w-2. If she is under 18, you do not have to withhold FICA. You should not give her a 1099-Misc.
Reference: https://www.irs.gov/businesses/small-businesses-self-employed/family-help
You do not put your dependent's income on your return*, even if she has enough income to have to file
*There is an exception If her only income is from interest and dividends, Alaska PFD or capital gains distributions shown on a 1099-DIV,
How old is she? None of those are right. But #2 is the closest. If she is under 19 or under 24 and a full time student you claim her as a dependent and she can not claim her own personal exemption. Will you be giving her a W2 or a 1099Misc? There are special rules for employing your child that I don't know. Like I think you don't have to hold out SS and Medicare.
Her income would only go on her return. You don't report it on yours. If it is on a W2 she doesn't have to file for less than $6,350 except to get back any withholding taken out. If she gets a 1099Misc she does have to file a return and report it as self employment income.
Is a child that age legally allowed to work in your state?
<a rel="nofollow" target="_blank" href="https://www.thebalance.com/child-labor-laws-397932">https://www.thebalance.com/child-labor-laws-397932</a>
@Hal_Al That does NOT apply to your own children.
<a rel="nofollow" target="_blank" href="https://www.dol.gov/general/topic/youthlabor/employmentparents">https://www.dol.gov/general/topic/youthlabor/employmentparents</a>
Actually #1 is correct. She does not file a tax return because the filing threshold for a dependent, with earned income, is $6350 (2017) ($12,200 in 2019). She can still be your dependent.
You must issue her a w-2. If she is under 18, you do not have to withhold FICA. You should not give her a 1099-Misc.
Reference: https://www.irs.gov/businesses/small-businesses-self-employed/family-help
You do not put your dependent's income on your return*, even if she has enough income to have to file
*There is an exception If her only income is from interest and dividends, Alaska PFD or capital gains distributions shown on a 1099-DIV,
<a rel="nofollow" target="_blank" href="https://www.entrepreneur.com/article/223968">https://www.entrepreneur.com/article/223968</a>
A W-2 would not be necessary because nothing is subject to Social Security and Medicare taxes, and no income taxes are withheld.
However, do it anyways. It will solidify that she is your employee. You may even consider filing Forms 941/944 and 940 each year to report the $0 due. Make sure you do all of the requirements for Employees, such as having her fill out a W-4 and I-9, and posting any required Workplace posters.
Solidifying that she is your employee, solidifies the business deduction for the wage expense.
<a rel="nofollow" target="_blank" href="https://www.thebalance.com/hiring-family-members-in-your-business-398010">https://www.thebalance.com/hiring-family-members-in-your-business-398010</a>