Should I give my child a 1099 or a W-2 as payment?

Hiring your kids as legal employees for your company is a smart move. In fact, the more money you can save by hiring your children, the greater the taxes you must pay.

You can deduct your children’s wages from your business income as business costs when they work for you in your company. Children under the age of 18 will not be required to pay Social Security or Medicare taxes.

W-2 or 1099?

Paying your child with a W-2 is preferred. Neither you nor your child will be required to pay Social Security or Medicare taxes when paid on a W-2. Additionally, you won’t be required to pay unemployment taxes. There is no need to pay income tax if the wage is less than $12,950.

However, the child will be responsible for paying self-employment taxes if you pay on a 1099.

Your company is a “disregarded entity” for federal tax purposes if it is a single-member LLC. You and your child will not be required to pay Social Security and Medicare taxes because it is only taxed as a single proprietorship.

However, if the company is run as a corporation, your child will be responsible for paying for Social Security and Medicare.

Children’s Income Taxes

Your child will have to pay taxes on the salary you pay them if it exceeds the standard deduction level. For single taxpayers, the standard deduction in 2022 is $12,950. As a result, you are not required to pay taxes on payments made to your kid up to $12,950 year or $1,079 per month.

However, they will be required to pay tax if their annual wage exceeds $12,950. The table below shows the tax rates for 2022.

Income Tax RateSingle Taxpayers
10%$0 – $10,275
12%$10,276 – $41,775
22%$41,776 – $89,075
24%$89,076 – $170,050
32%$170,051 – $215,950
35%$215,951 – $539,900
37%over $539,900

Always abide by the law

The Internal Revenue Service is constantly on the lookout for taxpayers who take advantage of this tactic since they are aware of the tax benefits of hiring your child. Your children won’t be eligible for such deductions and will instead have to pay taxes on the salaries once the IRS is able to establish that they are not legal employees.

You can avoid this by adhering to the following three guidelines:

1. Your youngster must hold a valid job.

It is crucial to confirm that your child is an actual employee of your company. They are only eligible for payment when they complete tasks that are essential to your company. If your child is paid for personal services like mowing your lawn or watching their younger siblings, they cannot claim those expenses as company expenses. However, they are entitled to tax deductions for money spent on yard work done on property used for business.

The IRS only permits children to assist with practical work in your business if they are at least seven years old. Keep a record of the tasks your kid completes and the hours they work. Make careful to record the date, the task completed, and the number of hours. You can make a paper timesheet or spreadsheet, utilize an app, or both.

2. The pay must be reasonable.

You must pay your kids as much as you can to qualify for the deduction. Your children will be able to retain the majority of your business income thanks to this, with relatively minimal tax benefits. You are unable to pay however much you please. For the services they are providing, you must make sure you are paying a reasonable salary.

Find out how much other companies are paying their employees to complete those duties. Additionally, you must provide proof of your payment. Don’t give your youngster cash rewards for doing this. Pay instead by cheque or direct deposit like you would for other employees. The name of your child or your spouse should be on the bank account where you deposit the salary.

3. You must adhere to all employer-related legal requirements.

Check to see if you adhere to all the legal standards that would apply if you were hiring a stranger. You must complete the IRS Form W-4, the USCIS Form I-9, the Employment Eligibility Verification, and the Social Security number of the employee.

A valid Employer Identification Number is also required (EIN). If you do not already have one, you can obtain one by visiting the IRS website or by completing IRS Form SS-4. Every year, you must complete and submit the IRS Form W-2 to demonstrate the amount you are paying your child.

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