Teen Kid's Pay below Standard Deduction - Filing Needed? How?

Question

Throughout the internet, there are too many contradicting responses by CPAs on teen kid's pay for assistance in parents' rental business work. Brandon Hall Vs. Mark J Kohler to name a few. One says that W-2 is needed even if it is under the Standard Deduction (https://youtu.be/1F6proZomHU), and the other says the opposite, that W-2 is not needed (https://youtu.be/ZVyqDK4pkc8). Unfortunately, my CPA is also confused...

As we have several rental properties (along with our day jobs) any help is appreciated. Please take into account that all is legit, Work Agreement with our 15 yrs old son is prepared, work hours are justified and logged, hourly rates are fair, labor regulations are met, etc.

Is there a definitive and bulletproof answer on it? If so, what is the 'mechanics' of it using Schedule E (w/o LLCs)?

Thank you for trying to clear this confusing subject.

Shimi T. · Answer

I had to google "FAFSA"...Well, My Master's in Engineering Science was done here in the States but I had to pay every penny of it :)Thank you for your indication. It is now confirmed that hiring your kid for help has tons of benefits, but may also have a (costly) disadvantage...quite Interesting. With the prices of college tuitions, I may let him play video games now and hire an outside helper instead... ;)Again, thank you for the knowledge and wisdom.

Lynnette E. · Answer

I have two kids that turned 18 this past year. They have worked for me for a few years. They are much better than contractors for many jobs, plus they show up! They do real work, lay flooring, demo, build decks, sister framing that needs it, sometimes rebuilding the framing, lots of stuff.My first CPA said, nope, do not file the w-2s for them. But my current one said to do it. Why? He says it is documented proof of the expense for my rental business, plus documented proof that they have earned income for their ROTH IRAS. He said that they really do not want to try to prove they did not get a mommy hand out and really did the work for earned income later in life. So now I do w-2 forms. And starting this year, pay SS for their work, because they now are 18.They are both going to college. They had to declare their income on the scholarship paperwork. The question was INCOME, not W-2 income. They also had to declare their bank account balances. We blew it there, not knowing the repercussions of that question. They had saved money to buy their own cars, but had not purchased them at the time we filled out that paperwork. They also had their ROTH deposit in their account because we had not sent it on to the financial manager yet. Two bad oops! They bought nice vehicles because that is what they wanted, and they saved for them. So $13-15k each went towards the car down payment and is not available for college. MY savings, same thing, way too high! They did not have to declare their Roth's or my retirement $. Wish we had made the ROTH deposit before we did that form, and bought the vehicle. But since our savings were high, they do not qualify for anything but the TN Promise (which is great and does cover the tuition for a year or 2, depending on the program).So, yeah, if you let your kid sit at home, not working they will possibly get more college assistance. But if you do well yourself, they still will not get assistance. So that is the decision--do you want your kids to learn to manage money before college? IF so they need more than the monopoly money to learn with. So, even though my kids wont get scholarship money to pay for the books, tools (one will be a diesel mechanic, a few thousand in required tools) and the other a chef (about a thousand culinary/knife sets, and another in wardrobe), or the housing expenses, they will be much better off than many kids because they know how to earn money, save it, manager it, plan for big purchases, etc. And in the end I can afford to pay for what they need, and am grateful for the TN Promise money that everyone can get by following the program and doing the community service.In the end I would rather have a financially educated child than have the scholarship money. Or a kid that blew through their earned money with nothing to show for a few years of work. I like that my kids decided to use a big down payment to get an affordable monthly payment on a 2 year old nice vehicle. He put a lot of financial education to work in that decision, and that is worth him having a large bank account and losing the grant for tools and books, etc.The scholarship program rewards the truly poor and those who are not financially responsible.

Michael Plaks · Answer

Such impact is present regardless of W2. Kids are being asked about their earnings when completing FAFSA to apply for financial aid. Not receiving a W2 does not mean there was no earnings.

Ashish Acharya · Answer

It is not as complicated as you think. You can pay kids two ways: - 1099s (The income will be subject to FICA tax 15.3%)- W-2 - Might avoid SE tax (FICA TAX). When the owner of a disregarded SMLLC, Sole, or partnership (each partner is a parent of the child) is the parent of an employee-child, the wages will be exempt from FICA taxes if the child is under 18 and exempt from FUTA tax if the child is under 21. Employing the owner's child in the owner's closely held business can be an effective tool to reduce the overall family tax burden. For example, a child can earn up to $18,550 in 2021 without paying any income taxes ($12,550 standard deduction plus $6,000 deductible IRA contribution). Wages paid to a child also create opportunities to shift earned income to the child's lower bracket and to reduce the income and FICA taxes of the family unit. Perhaps even more importantly, wages paid to a child may help avoid the imposition of the onerous kiddie tax rules for a child who is 18 years old (19 to 23 years old if the child is a student) if the child provides more than half of his or her own support with earned income.

Eamonn McElroy · Answer

It's very unlikely that a dependent child will be an IC as opposed to an employee when working for the parents if we do a facts and circumstances analysis. It is even moreso unlikely under OP's state law with the newly enacted California ABC Test...Furthermore, the FICA exemption applies only to W-2 wages. If you take the position that the child is an IC you are implicitly taking the position that they will pay SE tax (and file a return) if the applicable thresholds are met, as there is no such exemption from SECA for a dependent child.

Basit Siddiqi · Answer

I agree with others that a W-2 will be required.Maybe mark meant a payroll tax return is not required since there is no FICA taxes being paid?

Shimi T. · Answer

@Ashish Acharya, @Michael PlaksThank you greatly for spending the time and clearing the confusion on this issue with your thorough responses. Much appreciated. I'll go through the details and the article provided. Michael, per your reply about a potential disadvantage of filing W-2 for the kid, it may be the potential impact on receiving college scholarship money in the future due to its past earnings. This disadvantage was mentioned in one of the threads. I'll be happy to have any input on this concern.

Michael Plaks · Answer

@Shimi T. I'm with @Brandon Hall on this one: file W2s. If you need more support, here is a well-written article by Stephen Fishman that has outdated numbers but is otherwise still relevant: https://www.nolo.com/legal-enc... I have no idea why Mark Kohler suggests to not file W2s. They are required, as far as I know. And even if an IRS agent will give you a pass, as Mark suggests, why not file them? It's a minor chore with zero tax cost. And the child will have a clear proof of earned income eligible for retirement contributions.