Child employment

[Tax Sleuth]

A parent owns a sole proprietorship, and his son, an employee, was over age 18 in 2018. The son was paid a few hundred dollars with business checks throughout the year, and my understanding is the son's compensation is subject to social security and Medicare taxes. No payroll taxes were done for the son, and the parent does not plan to issue a 2018 Form W-2 for him. Could this employer be subject to penalties? How would you advise this business owner to proceed in these circumstances?

[TaxGuyBill]

Yes, not filing payroll return and not filing a W-2/W-3 are subject to penalties.

You need to advise the parent to file the payroll returns and W-2/W-3 (I would give the advise in writing, perhaps via email so you could prove that you gave the advise). Filing now (in January) will result in little or no penalties. Filing later will result in much larger penalties.

[Tax Sleuth]

My understanding from reading the IRS rules is the amount that the son was paid is not relevant. In other words, the son could have been paid $100 or $700, and in either case, the son's compensation would be subject to social security and Medicare taxes. The payroll returns would have to be filed now to reflect this reality and a W-2/W-3 would have to be filed for 2018. Am I correct?

[terryats]

Maybe, he could issue his son a 1099MISC. Depending on the circumstances, and the nature of his business

[TaxGuyBill]

My understanding from reading the IRS rules is the amount that the son was paid is not relevant. In other words, the son could have been paid $100 or $700, and in either case, the son's compensation would be subject to social security and Medicare taxes. The payroll returns would have to be filed now to reflect this reality and a W-2/W-3 would have to be filed for 2018. Am I correct?

Yes. It is possible they can file a 944 rather than four 941s (I would need to look up the rules about IRS approval for that). If they qualify for a 944, they can file that and W-2/W-3 this month and there would be no penalties.

[Burke]

A parent owns a sole proprietorship, and his son, an employee, was over age 18 in 2018. The son was paid a few hundred dollars with business checks throughout the year, and my understanding is the son's compensation is subject to social security and Medicare taxes. No payroll taxes were done for the son, and the parent does not plan to issue a 2018 Form W-2 for him. Could this employer be subject to penalties? How would you advise this business owner to proceed in these circumstances?

A few hundred dollars would not likely amount to any income tax due on the son's part if this were his only income. But if the employer/parent plans to deduct this as an expense, he must file a W-2 and pay the corresponding payroll taxes. If he does not claim it as an expense, it would reflect in an increased profit for himself, and he would pay the SE tax accordingly on his own return. So if he refuses to issue the W-2, you will not be able to deduct the expense. Sounds like it was intermittent work; perhaps a 1099MISC would meet the requirements.