When Do We Have to Issue 1099 or W2 to Relatives?

One of our readers wrote in the following question:

“How much can I pay grandchildren without generating 1099 or w2 ?”

This is a question that we seem to get periodically throughout the year and the answer depends on what type of services are being performed.

If a grandparent (or parent) is having a grandchild or child perform services on their farm, they should issue a form W2 at the end of the year for all work performed even if it is only $10.  This is what the law requires and it also gives social security credit to the grandchild for their retirement (assuming social security is still around).  If a farmer pays wages to their child who is less than age 18, these wages are not subject to social security and Medicare taxes, however, you still should issue a W2.  For farmers in this situation, this is one of the best tax planning opportunities that can be used effectively.

For contract services that a grandchild performs on the farm such as spraying services that they provide to the grandparent and other farmers, if the payment is less than $600 for the whole year, no 1099 is required.  If the total payments made to the grandchild exceeds $600 then a form 1099 is required.  Remember, that if you are controlling how the grandchild performs the service (i.e. it looks more like wages than contract services), you are required to treat these payments as wages and not contract services.

The penalties for not reporting on these forms is getting steeper each year.  In some cases, the penalty can exceed $100 for each violation.