| “I paid my daughter - who is under 21 - a little over $2,000 for childcare of my two younger children in 2011. Since she's my child, and under 21, I understand that the wages are not subject to FICA/FUTA tax.”---->Correct. As your child is under the age of 21, you don’t need to pay employment taxes; you do not withhold or pay social security and Medicare taxes from wages you pay to your daughter. You do not pay FUTA tax for your daughter either since you do not count wages paid to your child who is under the age of 21.
“Should I have still given her a W-2?”----->No; if you must withhold and pay social security and Medicare taxes, or if you withhold Federal /state income tax, you will need to complete Form W-2 for her. A W-2 is a form as proof of the wages paid and the taxes withheld by your employer for the previous calendar year. You can deduct the expenses for child/dependent care credit on your 1040. ALSO UNLESS babysitting is your daughter’s business, you do not need to issue a 1099 to her. However, your daughter needs to report the income on her SchC/ Sch C-EZ/Sch SE as long as the amount on Sch SE line 4 is $00 or exceeds $400, then she needs to pay self-employment tax on her return. In the eyes of the state and the IRS, a person working as a nanny is considered to be self-employed.
“Also, should this income be reported on a financial aid (FAFSA) application?”---->I think so; as long as she has a job and earns income and reports it to the IRS, Then FAFSA people count that income when determining how much income her family has UNLESS you pay her under the table money and she doesn’t repot it to the IRS as her income(this is illegal; then FAFSA has no proof of any income and will not count it against you.) . The higher the income, the less aid she qualifies for.
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