Hire your Kids

[tsimp]

Taxpayer hires son (age 17) to help with the rental business , pays him $5000 . I know because he is under 18, the taxpayer pays no social security,medicare or state unemployment/disability taxes. Q1: Does the taxpayer provide his son with a W-2 at the end of the year. Q2: Does the son pay self-employment tax on the $5000 when he files his taxes. Thanks

[oceanlovin'ea]

SE tax results from Schedule C income. So if he gives him W-2, he would not pay SE tax.

Since under 18, it is not required to be paid.Leave those boxes blank on W-2.

Son would have to file a tax return though.

Linda F

[lsmith]

see circular E

Q1: issue W2
Q2: no

[OldJack]

Question 3... did the son actually earn the $5,000 or is the father cheating on his tax return?

Question 4.. should you sign the tax return as preparer?

[gkaiseril]

Son is eligiable for IRA or Roth IRA.

[Jiggers]

Son as employee

Does the son have to file a return with only 5,000 income? I say no.

[gkaiseril]

I do not think there is enough information to make the determination on wages from one job only.

Does the child have any other income?

Any other source of income or specisl taxes could trigger a dependents return. See page 13 of the form 1040 instructions.

[Kram BergGold]

Very Unusual

I have never seen a Schedule E, rental, with wages. Did you rclient get a EIN for this activity?

[gkaiseril]

Taxpayer may have rental activity in a coporation or partnership and already have an EIN, otherwise yes taxpayer needs EIN for payment of employment and most other federal taxes and may need to obtain a state ID as well.

[Joe Btfsplk]

Is it real estate rental?

I have never seen a Schedule E, rental, with wages. Did you rclient get a EIN for this activity?

Maybe he rents something other than real estate.
If it is a passive activity, then there should be no W-2 wages. Maybe he could issue a 1099 Misc for work done on a contract basis.

If it is merely a way to cut his taxes rather than bonafide expense of the rental operation, then there should be no forms and no deduction.

[gkaiseril]

It looks like the taxpayer is using the child family member under 21 are not subject to FICA and Medicare tax on the child wages, See page 8 of the 2006 IRS Pub 15. The $5,000.00 is to avoid income tax.. A 1099-Misc over $400.00 will trigger SE taxes at an even higher rate than as an employee.

I had a neighbor that owned rental property and when FDR passed Social Security, he set his rental activity up to pay himself and his wife a salary. He was a self employed doctor and at that time was not subject to SE tax. He did this so he could get his share of the free money.

[Luis Mopeo]

Maybe he rents something other than real estate.
If it is a passive activity, then there should be no W-2 wages. Maybe he could issue a 1099 Misc for work done on a contract basis.

If it is merely a way to cut his taxes rather than bonafide expense of the rental operation, then there should be no forms and no deduction.

What does passive rental have to do with whether there is an employer/employee relationship?

As many have said, it has to be a bona-fide working relationship. But paying children to work is a legitimate income-shifting strategy.

[Davc]

Agree with Luis.