Putting your child on payroll – W-2 or 1099?

We get this question a lot. It’s not uncommon for business owners to hire one (or more) of their children. The key question is, what is the best way to pay them?

There are two options. Your child can either be an employee or a contractor. Employees will receive a W-2 at the end of the year, and contractors receive a 1099.

So, which is best for business owners and their children?

Like everything, it’s based on facts and circumstances. However, in most cases, it is most advantageous to put them on payroll as a W-2 employee. 

If your business is structured as a sole proprietorship, LLC single member, LLC partnership, or regular partnership, there are significant advantages to paying your child as an employee for the work they do for you. Here’s why.

You can deduct the wages you pay your kid(s), you (the employer) don’t have to pay the social security and medicare match, and you don’t have to withhold social security and medicare from your kids’ wages.  

Additionally, your child doesn’t have to pay federal income tax up to the standard deduction amount ($12,950 in income in a given year currently). And, if they are paid from one of these 4 entity types, he or she doesn’t pay social security and medicare tax. If their annual income from your business exceeds $12,950, the child is still exempt from paying social security tax and medicare tax, but your child will pay income tax on the amount over $12,950.

If your business is an S corp or C corp

If your child is an employee of your business that is an S corp or C corp, you are not exempt from paying the employment taxes, meaning both the employer and employee must pay social security and medicare taxes. However, your child still doesn’t have to pay income tax up to standard deduction ($12,950 currently).

When would I pay my child as a contractor instead of an employee?

If you have a child who owns a business and you want to do business with them, it may make sense to pay them as a contractor. For example, if your child has a landscaping company and you want to do business with them for your business, it makes sense to pay them as a contractor just like you would for any other contractor. In this circumstance, they get an opportunity to deduct incidental expenses he or she needs to run their business.

If you have questions about how best to structure paying your kids in your business, we can help. We specialize in empowering entrepreneurs to enjoy the business journey. Call us at (614) 456-7222, or email us a tax@harpercpaplus.com anytime. We’ll schedule a time to meet, put a plan together, and help you implement the best strategy for your business.

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