Why is a minor child required to pay taxes

[jctaxfile]

My child is 14 and work for family company. I issued W2 of $6250 for her contribution. By IRS rules, I do not need to hold any SS tax, medicare tax, or FUTA tax.

1) When I was issuing the W2, Turbotax constantly told me that Form 941 is not consistent. As a result, I ignore the warnings and it should be OK.

2) When I am filing the tax, Turbotax warned me multiple times that the kid will received a W-2c form.  The information is like ... "since you deferred some of your social security taxes last year, you will get form W-2c from your employer once you've repaid what you deferred."...

I am totally confused with the above warnings.

3) NY is charging the kid $125 tax. Should state tax be zero as well for minor child?

Thank you very much for your help.

[DanielV01]

You have several questions.  Please note the following:

Payroll taxes.  There is a nice provision that allows for a child working on behalf of a "family business" to be exempt from payroll taxes.  However, as you will note at this IRS link Children and Payroll Taxes (and notice the section in purple), this treatment is not available if the family business has an S-Corp or a Partnership structure, unless (only in the case of the Partnership), the only partners are both parents.  Otherwise, FICA, and FUTA withholdings are required.

Unemployment taxes.  Your state may require these to be paid regardless.  Check with your state guidelines on this.

Deferred Social Security taxes.  That warning does not apply to your situation.  It is absolutely possible that you may have to pay the standard Social Security/Medicare taxes according to the first paragraph, but deferred Social Security was a COVID provision brought into play through executive order in 2021.  That has nothing to do with your situation.  If that diagnostic is preventing you from filing payroll taxes or other returns, please call in this experience to our phone customer support service by using the instructions in the following link: How do I contact TurboTax?

New York is Charging Tax.  Why?  You may not be required to withhold New York taxes on your child, but that doesn't mean he doesn't pay taxes.  Note this New York website:  Filing requirements in New York.  You will notice that an individual claimed as a dependent who has more than $3100 in reportable income must file.  This usually means they will pay tax on amounts above $3100 unless they qualify for certain additional deductions or credits.  Given New York's base tax bracket, $125 actually sounds like the correct amount on your child's reportable wages.

[jctaxfile]

Thank you very much for the reply.

Yes, in my case the business is a LLC and the only partner are one of the parent. So we do quality for no Children payroll taxes.

I do plan to switch to S-corp in the future to save the payroll tax ~15%. But according to your answer, I should not because  children payroll taxes is not exemped from S-corp? In addition, switching from LLC to S-corp do I need to redo all taxes in the past years?

In my case, the family business is small and yearly generate profits of ~$10000, and after paying kids $6000 we only have $4000 profits which need to pay $600 payroll tax (~15%).  I am balancing the cons and pros of LLC vs S-corp.

I consulted with external tax consultant. Although they provided some interesting ideas, but in general they want me to stop using Turbotax and use their services. I have been using Turbotax for more than 10 years and really don't want to switch.

[ThomasM125]

You wouldn't need to redo any payroll taxes in previous years, since you were in compliance based on the tax status of the business when the taxes were filed.

As an S corporation you are required to pay a reasonable salary to owners and others who perform services for the company. The IRS normally treats distributions as salary to the extent they are paid from profits and a reasonable salary has not already been reported.