I paid my children a small wage to help me in my business. How do I enter the fact that these are non-taxable wages on the W2. Does it go into box 14--notaxable I? Any help is appreciated.
They are exempt from employment tax (assuming you meet the requirements), but not exempt from income tax, even if they didn't earn enough to actually pay any income tax. Gross wages go in box 1. Zeros in boxes 3 through 6 indicate the exemption.
-- Phil Marti Clarksburg, MD
wrote
They go in Box 1 of the W-2.
-- Paul Thomas, CPA snipped-for-privacy@bellsouth.net
The wages are not non-taxable. If your children are under age 19, their wages are not subject to FICA withholding or matching by you, the employer. That would mean zero in the FICA and Medicare wages boxes.
If they are YOUR children (natural or adopted), and under the age of 18, their income is exempt from FICA W/H, exempt from the company match of FICA and exempt from FUTA and usually SUTA taxes. Once they turn 18, the next pay, all that stuff kicks in. Their earnings are considered gross income, its just not taxed for Soc Sec or Unemployment. On the W-2, enter the total wages in Box 1. If there was Fed W/H, enter that in Box 2, and if none, enter "-0-" . Then enter "-0-" in Box 3 and Box 5 for Medicare and Soc Sec wages. Usually, the Box 1 amount goes in Boxes 17 and 19 as state and local gross income. That's it. You'll need a W-3. Paying a child is a great tax planning tool, as they can then open an traditional IRA and exclude all the income up to the $4000 limit, and still learn about savings and tax planning. If you pay them more, they can spend their own money, rather than asking for an allowance, and it is tax deductible on your Sch C, reducing your income tax and your soc sec tax. You must be able to justify the pay rate and hours worked if the IRS asks, and it must be reasonable, and ordinary and necessary ... such as taking out trash, cleaning, answering the phone, filing transcribing phone messages, handling internet requests, designing websites and updating them ..... etc. You know your kids can do this,
IMO a far better approach is for the child to open a Roth IRA, assuming we're talking about gross wages less than the Single standard deduction. The child still doesn't pay any tax, and the Roth distributions will be tax-free after many years of growth.
-- Phil Marti Clarksburg, MD
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