Will Your Child Get a W2 This Year?
Fair warning – this article may be a bit long. If you just want a quick summary, skip to the bottom and read The Bottom Line. Now, on to the details:
Many children have jobs, from babysitting to working retail. A W2 is wage summary required to be sent to any employees by January 31st of the following tax year. Cash payments or contractors do not receive W2 statements (sorry babysitters!) but may receive 1099 statements.
Receipt of the W2 often create many questions as to the tax liability of the minor. Minors have unique tax brackets and opportunities to be aware of.
First, it’s important to understand the distinction between earned income and unearned income. Earned income is income from active work and is typically reported on a 1099 or W2 statement at the end of the year. Unearned income is income from investments such as dividends, interest, and capital gains. Retirement accounts, such as a minor’s Roth IRA do not produce income (more on that later).
Do They Have to File a Tax Return
Many unique situations exist, so if there is a question, consult a CPA. However, most minors do not have to file a tax return if their income is under certain thresholds. Any minor who can be claimed as a dependent only needs to file a tax return if their income is above the standard deduction.
Standard Deduction for Minors:
Unearned Income: $1,350
Earned Income: $15,750
Mix of Unearned and Earned Income: Earned Income + $450 up to $15,750
If a minor had taxes withheld from their paycheck, but was under the standard deduction, they may want to file a tax return to claim a tax refund on their withholding. This is only true for federal and state tax – unfortunately, payroll tax such as Social Security and Medicare tax cannot be refunded. For this reason, many minors who are filling out a W4 for their job will want to claim “EXEMPT”, so taxes are not withheld.
What is Kiddie Tax?
The kiddie tax exists to prevent parents from transferring unearned income tax liability to their children.
Parents often open UTMA accounts for their children. UTMA stands for Uniform Transfer to Minors Act. This is taxable investments held in the minor’s name with a guardian overseeing those funds until the minor comes of age (usually 18 or 21). Unlike retirement accounts or 529’s, these funds are taxable, however, any amount may be given to the child.
To prevent parents from transferring a large tax liability to their children, who may be in much lower tax brackets, the Kiddie Tax exists.
For unearned income under the minor’s standard deduction ($1350) there is no tax due. That means, the first $1,350 of dividends, interest and capital gains carries no tax. The next $1,350 is then taxed at the child’s tax rate. For most children, this would be the 10% bracket. For any amount over $2,700, the income is taxed at the parents’ marginal rate.
What Should My Child Do with the Money?
My first experience investing came when I was about 8 years old. I wasn’t as tall as the teller counter at the bank, and I remember the banker leaning over to hand me a tri-fold brochure detailing the benefits of a CD. I was amazed – you mean to tell me if I promise to leave my money in the bank for the next 6 months, you’ll give me more back? Most of my balance was birthday money and I had no plans on spending it. It was a fantastic introduction to interest and got me hooked on investing from that point forward.
We often recommend opening a CD at the bank for a child’s first investment experience. Keep the term low, such as 6 months or a year and use the experience to teach the child about interest and making money with money. Learning about compound interest can be lifechanging.
When the sums get a little larger (beyond birthday money) something more sophisticated may be in order.
A UTMA is a common choice. It is a taxable investment account that can be used for any purpose for the child’s benefit. The funds become theirs once they reach the age of majority (21 in Wisconsin). This is the child’s own asset and is reportable as such on forms like the FAFSA.
A 529 for the benefit of the child is a good choice. This is typically the parent’s money can only be used for qualified education expenses.
A minor Roth IRA, however, may be the best option for the child. For a child to contribute to a Roth IRA they must have earned income (W2 wages or reportable 1099 income – sorry babysitters). They can contribute all their W2 wages up to the limit which is $7,500 for 2026. As a retirement account, it is completely tax free and not reportable as an asset on the FAFSA. Further, any contributions made to the account can be withdrawn for any reason, however, interest the account earns needs to be left in the account until age 59.5.
The Bottom Line
Keep an eye out for that W2 if your child had a regular paying job. Check for any tax withholding – if there is any, consider filing EXEMPT next year if they qualify. Earn some interest on the money, either through a CD at the bank or a UTMA account. The first $1,350 is tax free. And, if it makes sense, think about opening a minor’s Roth IRA to supercharge the tax savings and long-term growth.
The information given herein is taken from source that IFP Advisors, LLC, dba Independent Financial Partners (IFP), IFP Securities, LLC, dba Independent Financial Partners (IFP), and its advisors believe to be reliable, but is not guaranteed by us as to accuracy or completeness. This is for information purposes only and in no event should be construed as an offer to sell or solicitation or an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as IFP does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. This report may not be reproduced, distributed, or published by any person for any purpose without IFP's express prior written consent.