Report if pay the children under 18 year old

[dcdan05]

Hi,

I am a sole proprietorship and pay my kid (15 years) for $10,000 in 2020, helping the data entry work. 

Do I need to issue a 1099 to her? if not, how do I report this income to IRS?

Does she need to file tax and pay SE tax? 

Thanks so much.

[ToddL99]

If you are claiming a business expense deduction for this expense, you must report her earnings on Form 1099-NEC and she must file a tax return (Form 1040, Schedule C and Schedule SE - at least). 

[jessicasote]

@ToddL99 when paying children under 18 (from a sole prop business owned by their parent) is a 1099nec better than a W2 or vice versa?

[Opus 17]

@jessicasote 

Unfortunately, @ToddL99 @‘s answer is incomplete. 

First of all, the question of whether a child is an employee or an independent contractor is judged on the same factors as an unrelated person. They are an employee or an independent contractor based on the relationship between the worker and the business, and the level of control exerted by the business over the worker, their working conditions, hours, and so forth.  Here is one of the IRS webpages that discusses this issue.

https://www.irs.gov/newsroom/understanding-employee-vs-contractor-designation

Then, if the business is a sole proprietorship or LLC reported on schedule C as a disregarded entity, and if the child is an employee (and under age 18), the parent is not required to withhold or pay Social Security and Medicare tax. They are required to issue a W-2.  They may have other responsibilities under state law, relating to the number of hours a child may work and limitations on a child’s working conditions. They may be required to follow any number of other state labor laws that apply to all employees. Whether there are exceptions to certain labor laws for the employer‘s own child is something that would have to be researched in each state.

If the child is an independent contractor, the parent would issue a 1099-NEC and the child would report a schedule C on their own tax return, including paying self-employment tax.

Financially, because a parent is not required to pay Social Security tax for their child under age 18 as their employee, the child will pay more tax if they are categorized as an independent contractor.   However, the real test is based on the relationship between the worker and the employer, and I am not aware of any special rules that apply to children as opposed to unrelated adults.  If an unrelated worker doing the same job would be classified as an independent contractor, then that would also be appropriate for the child. If an unrelated worker would be classified as an employee and would have certain rights and obligations under state law, that would apply to the child as well.

[macuser_22]

It also depends on the nature of the work, for example if the child is doing what would normally be called "household chores" that are expected to be done by household members, then the IRS could look at it as sham employment for you to claim a child's allowance as a deductible business expense.

[Opus 17]

I think what you want to be doing, to show that these are real wages for services performed, is to pay a similar wage to what you would pay an unrelated person for similar duties, and to ensure the child is actually capable of performing these duties.  For example, if your child is helping you with bookkeeping and billing and invoicing, for three hours a week, it would probably not be well reviewed by the IRS if you were paying them $1000 a month for 12 hours work.

[jessicasote]

@Opus 17 thank you! You gave me the exact information I was looking for. I couldn't find a direct answer when searching online anywhere. For me, it would be easier to just issue a 1099 but I think a W-2 is the way to go.