A number of parents leverage the advantages of owning or operating a small business by employing their children in the company. Others have their kids work jobs at fast-food restaurants or elsewhere to teach them the value of money by making them earn their own. When tax time comes around, the question becomes: Who reports the work on their tax return, and how?
Income Reporting Threshold
According to the IRS, any income that an individual earns that puts him over $600 in total income for the year must be reported by the company providing the income. Therefore, the short answer is, if your child earned at least $600 in a given calendar year, then he should receive a W-2. You can use that W-2 to prepare your child’s tax return, or you can claim that income on your tax return.
The IRS requires a separate tax return for your child when your child makes the larger of $950 in gross income or $5,800 in earned income. At these income levels, the IRS deems that a child has made enough money to file his own return or to have you as the parent file a separate return on his behalf. The child needs a W-2 to file a tax return.
Earned income is income or salary from a job including tips, or other taxable employee pay — all of which are reported on a W-2. Gross income is earned income plus unearned income. Trust-fund distributions, capital gains, taxable interest, and annuities are some of the income categories that are designated unearned income. Gross income is typically reported on a 1099. Under the income thresholds, parents can opt to include or exclude their children's income on their own tax returns.
Refund of Taxes Paid
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If your child paid taxes and you believe no taxes should have been paid, you will need your children’s W-2s, no matter how much they earned, in order to seek a refund. Any and all income taxes deducted will show in box 2 on the W-2. If your child paid taxes and is due a refund, you should file to get a refund of those taxes. To confirm, double check your children’s paychecks. If your kids had minimal or no taxes taken from their paychecks and they are below the earned income limit, then you do not need their W-2.
Tiffany C. Wright has been writing since 2007. She is a business owner, interim CEO and author of "Solving the Capital Equation: Financing Solutions for Small Businesses." Wright has helped companies obtain more than $31 million in financing. She holds a master's degree in finance and entrepreneurial management from the Wharton School of the University of Pennsylvania.