Last updated: March 2026
W-2. Almost always W-2. If your child is under 18 and working for your business, paying them as a W-2 employee is almost always the right move. And yet, I see parents issuing 1099s -- sometimes on the advice of their own CPA -- and costing themselves thousands of dollars in unnecessary taxes. (Not sure where to start? Read how we've been paying our daughter since she was 5.)
Let me explain why this matters so much.
The 1099 Trap
When you issue your child a 1099-NEC, you're classifying them as an independent contractor. That triggers self-employment tax: 15.3% on every dollar of net earnings.
So if you pay your 15-year-old $12,000 and issue a 1099, they'll owe approximately $1,696 in self-employment tax -- even though they owe zero income tax (because they're under the standard deduction). They also have to file a Schedule C and deal with quarterly estimated tax payments.
That 15.3% tax is money you didn't need to pay. With a W-2 from a sole proprietorship or qualifying LLC, children under 18 are exempt from FICA entirely. The self-employment tax is $0. The income tax is $0. Total tax: $0.
The difference between W-2 and 1099 for a child under 18 earning $12,000 is roughly $1,700 in unnecessary tax. That's not a rounding error.
Why Some CPAs Get This Wrong
This isn't a knock on CPAs -- most are excellent. But here's what happens:
Some tax professionals default to 1099s because they're simpler. No payroll setup, no quarterly filings, no W-2 at year-end. Just write a check and issue a 1099 in January. It's less work for the CPA.
Others may not be aware of the FICA exemption for family employment. If they primarily work with larger businesses or corporations (where the exemption doesn't apply), they may not realize the rules are different for sole proprietors and qualifying LLCs.
And some genuinely believe 1099 is the right answer because the child "controls how they do the work." While that's the standard independent contractor test, the IRS applies it differently to family businesses. In most cases, a parent directing their child's work makes the child an employee by definition.
When a W-2 Is the Right Choice
For children under 18, W-2 is the right choice when:
- Your business is a sole proprietorship, single-member LLC, or husband-wife LLC/partnership
- You control what work the child does, when they do it, and how they do it
- You provide the tools and workspace
- The child works on a regular or semi-regular schedule
Under these conditions, the child is an employee. Period. And as an employee of a parent's unincorporated business, their wages under age 18 are FICA-exempt. You'll want to pay a reasonable wage and keep proper IRS documentation.
The W-2 will show wages in Box 1 and zeros in Boxes 3 and 5 (Social Security and Medicare wages). This is correct and expected for a minor child of the business owner. Your child's wages are also deductible as a business expense.
When a 1099 Might Make Sense
There are limited situations where 1099 treatment could be appropriate:
Adult children (18+) doing project-based work. If your 20-year-old freelances a specific project for your business -- designs a website, creates a video series -- and controls how and when they do the work, 1099 may be appropriate. They'll owe self-employment tax, but they can also deduct business expenses against that income.
Children with their own separate business. If your teenager runs their own business and provides services to your business as a vendor, a 1099 might be appropriate. But this is rare and adds significant complexity.
For kids under 18 doing regular work for a parent-owned business, there's almost no scenario where a 1099 is better than a W-2.
The Roth IRA Connection
Here's another reason the W-2 matters: Roth IRA eligibility requires earned income. Both W-2 wages and 1099 self-employment income count -- but a W-2 is far cleaner documentation.
When you contribute $6,000 to your child's Roth IRA and the IRS sees a matching W-2 for $6,000, there's nothing to question. It's airtight. You can also pair this with a UGMA account for even more wealth-building flexibility.
With a 1099, the IRS may scrutinize whether the child is actually a legitimate independent contractor, which could put the entire Roth contribution at risk.
What If You Already Issued a 1099?
If you've been paying your child via 1099, don't panic. Here's what to do:
Going forward: Switch to W-2 employment. Set up basic payroll (or use a service like Kids Payroll), complete a W-4 and I-9, and start tracking hours.
For the current year: If you haven't filed yet, reclassify the child as an employee and issue a W-2 instead of a 1099.
For prior years: This gets more complicated. You may be able to file amended returns, but consult a tax professional who understands family employment. The self-employment tax your child paid may be recoverable. Learn more about what happens if the IRS audits your kids' payroll.
Quick Comparison
| W-2 (Under 18, Sole Prop/LLC) | 1099 (Under 18, Any Entity) | |
|---|---|---|
| Social Security tax | $0 | 12.4% (via SE tax) |
| Medicare tax | $0 | 2.9% (via SE tax) |
| FUTA | $0 (under 21) | $0 |
| Self-employment tax | N/A | 15.3% |
| Income tax | $0 (if under standard deduction) | $0 (if under standard deduction) |
| Roth IRA eligible | Yes | Yes |
| Filing complexity | Simple | Requires Schedule C + SE tax |
FAQ
Can I give my child a 1099 and a W-2 in the same year?
Technically, if they did both employee work and independent contractor work. But this creates confusion and is rarely advisable.
What if my child is 18 or older?
For adult children, the FICA exemption no longer applies, so the W-2 vs 1099 analysis changes. If they're doing regular employee work, W-2 is still appropriate -- but now FICA taxes apply. If they're doing independent project work, 1099 may make sense.
Do I need payroll software to issue a W-2?
Not necessarily, but it helps. You can manually compute W-2s for a child with no withholding, but payroll software (or an app like Kids Payroll) handles the forms and filing for you.
My child is my only "employee." Do I still need an EIN?
Yes. Any business with employees needs an Employer Identification Number. Apply free at IRS.gov.
Stop Overpaying Taxes on Your Child's Wages
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Disclaimer: This article is for educational purposes only and does not constitute tax or legal advice. Consult a qualified CPA or tax professional for guidance specific to your situation.