Roth IRA for a minor child?

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dred pirate
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Roth IRA for a minor child?

Post by dred pirate »

A couple of my friends and I were talking about setting up Roth IRA's for our children. We figured since their tax bracket is super low/non-existent, this would be a great tool to start teaching them about investments. We had a couple of questions/situations.

1. I know you need earned income and can only contribute up to what you made- but when I was a teenager we all often did odd jobs for other farmers in the area. We were always paid cash/check - never received any sort of official payroll check. Does this count as earned income? (my gut says no). I know my parents paid me a monthly "salary", not an allowance, because they could deduct it as a farm expense. I would think if they could deduct it, I could claim it as earned income. Although no payroll taxes were withheld, so I wonder how they could document the expense? (did they claim I was a 1099 worker?)

2. If you child doesn't make enough to require filing taxes (and it doesn't make sense financially to do such) - how does the IRS verify that the Individual who owns the Roth IRA is eligible? I would hate to have something come up years down the road (and years of penalties, etc if something wasn't right)

3. Finally, lets say my child makes 3k. Can I put the full 3k into a Roth IRA for them? Since they won't clear the full 3k (payroll taxes, etc) - can I still "match" their income and put 3k into the Roth?

thanks all!
rkhusky
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Re: Roth IRA for a minor child?

Post by rkhusky »

There is some information here:
https://www.bogleheads.org/wiki/Accounts_for_children

1. There are special rules when parents hire children through their business. Your parents may have not followed all the rules or perhaps rules were different back then.

Odd jobs for neighbors count as taxable compensation, but you should have paid employment taxes.

2. The brokerage sends information about IRA’s to the IRS each year around May.

3. You can contribute up to the total of taxable compensation.
Last edited by rkhusky on Sat May 30, 2020 2:39 pm, edited 6 times in total.
retired@50
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Re: Roth IRA for a minor child?

Post by retired@50 »

dred pirate wrote: Sat May 30, 2020 1:27 pm A couple of my friends and I were talking about setting up Roth IRA's for our children.
...
thanks all!
You should probably read through this thread before proceeding.

viewtopic.php?f=1&t=315554

Regards,
This is one person's opinion. Nothing more.
Topic Author
dred pirate
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Re: Roth IRA for a minor child?

Post by dred pirate »

retired@50 wrote: Sat May 30, 2020 2:23 pm
dred pirate wrote: Sat May 30, 2020 1:27 pm A couple of my friends and I were talking about setting up Roth IRA's for our children.
...
thanks all!
You should probably read through this thread before proceeding.

viewtopic.php?f=1&t=315554

Regards,
already did :-) not looking to do anything under the table - but was more interested in #2 and #3 and the part in #1 about working for neighbors (example - they mow my neighbors lawn and get paid $20. In that case they are essentially running a business, but it isn't like any substantial portion of kids that do things like this actually report it as business income. But I guess if we want to contribute to a roth using that money, we would have to keep business records. I likely will just wait until they have a "real job" that give a W-2
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FiveK
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Re: Roth IRA for a minor child?

Post by FiveK »

dred pirate wrote: Sat May 30, 2020 2:47 pm ...they mow my neighbors lawn and get paid $20. In that case they are essentially running a business, but it isn't like any substantial portion of kids that do things like this actually report it as business income. But I guess if we want to contribute to a roth using that money, we would have to keep business records.
If their net self-employment income is under ~$400, they don't need to file, don't owe self-employment tax, but can use that net income to justify a Roth IRA contribution.

If their SE income is above ~$400 they do owe SE tax and have a filing requirement.
mstrcvdstr
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Re: Roth IRA for a minor child?

Post by mstrcvdstr »

I set up Roth IRA for both of my children when they were minors. Years ago, farm families had slightly different IRS rules if the kids were working on the family farm. The SE tax did not start until a much higher income.

Non farm income for kids can be reported using 1040 for the kids. When I calculated the tax savings for me (I am in a high tax bracket) by deducting their pay from my farm income vs the cost of SE tax for them plus tax free growth for decades it was worth it for my family. The Roth savings may also be used for college, first home etc.

Yes, the kids did hard work on the ranch!
Spirit Rider
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Re: Roth IRA for a minor child?

Post by Spirit Rider »

FiveK wrote: Sat May 30, 2020 4:19 pm
dred pirate wrote: Sat May 30, 2020 2:47 pm ...they mow my neighbors lawn and get paid $20. In that case they are essentially running a business, but it isn't like any substantial portion of kids that do things like this actually report it as business income. But I guess if we want to contribute to a roth using that money, we would have to keep business records.
If their net self-employment income is under ~$400, they don't need to file, don't owe self-employment tax, but can use that net income to justify a Roth IRA contribution.

If their SE income is above ~$400 they do owe SE tax and have a filing requirement.
This is almost always household help and not self-employment income. They are not running a business.

It is extremely rare for a teenager to be able to be properly classified as an independent contractor. They can almost never be considered to have the Behavioral Control, Financial Control and Relationship of the Parties necessary.

Not to mention, why would you possibly want to elect self-employment* when there are no FICA taxes required wage if they are < age 18 and a student and no unemployment insurance if wages are < $1,000/quarter and no income tax withholding unless they request it. The homeowner has no requirement to run a payroll.

*The IRS has a problem with employees being misclassified as independent contractors. Being classified as an employee is always acceptable.

There is no requirement to file an income tax return, just keep records of all wages received. The full amount of wages are compensation eligible for IRA contributions.
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FiveK
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Re: Roth IRA for a minor child?

Post by FiveK »

Spirit Rider wrote: Sat May 30, 2020 10:02 pm It is extremely rare for a teenager to be able to be properly classified as an independent contractor. They can almost never be considered to have the Behavioral Control, Financial Control and Relationship of the Parties necessary.
Without getting into the definition of rare here, would teenagers who
- advertise themselves as lawn mowers for hire in the local paper, or
- referee soccer (or other) games for pay
be properly classified as independent contractors?
Spirit Rider
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Re: Roth IRA for a minor child?

Post by Spirit Rider »

FiveK wrote: Sat May 30, 2020 10:25 pm
Spirit Rider wrote: Sat May 30, 2020 10:02 pm It is extremely rare for a teenager to be able to be properly classified as an independent contractor. They can almost never be considered to have the Behavioral Control, Financial Control and Relationship of the Parties necessary.
Without getting into the definition of rare here, would teenagers who
- advertise themselves as lawn mowers for hire in the local paper, or
- referee soccer (or other) games for pay
be properly classified as independent contractors?
You missed the key point following the paragraph you quoted. They could, but as I pointed out why would you want to jump through hoops to do something that is unnecessary and counter-productive.

Why would you possibly want to pay self-employment taxes and have to file a tax return when doing nothing and treating them as wages as household help requires no FICA taxes and no income tax return < the standard deduction.

I don't know why people want to make this more complicated than it needs to be. Almost anything that a teenager does for a homeowner should be treated as household help wages.
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FiveK
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Re: Roth IRA for a minor child?

Post by FiveK »

Spirit Rider wrote: Sat May 30, 2020 11:23 pm
FiveK wrote: Sat May 30, 2020 10:25 pm
Spirit Rider wrote: Sat May 30, 2020 10:02 pm It is extremely rare for a teenager to be able to be properly classified as an independent contractor. They can almost never be considered to have the Behavioral Control, Financial Control and Relationship of the Parties necessary.
Without getting into the definition of rare here, would teenagers who
- advertise themselves as lawn mowers for hire in the local paper, or
- referee soccer (or other) games for pay
be properly classified as independent contractors?
You missed the key point following the paragraph you quoted. They could, but as I pointed out why would you want to jump through hoops to do something that is unnecessary and counter-productive.

Why would you possibly want to pay self-employment taxes and have to file a tax return when doing nothing and treating them as wages as household help requires no FICA taxes and no income tax return < the standard deduction.

I don't know why people want to make this more complicated than it needs to be. Almost anything that a teenager does for a homeowner should be treated as household help wages.
Perhaps because information such as Hiring Household Employees | Internal Revenue Service leaves room for doubt?

E.g., from that link, "You made an agreement with John Peters to care for your lawn. John runs a lawn care business and offers his services to the general public. He provides his own tools and supplies, and he hires and pays any helpers he needs. Neither John nor his helpers are your household employees."

If John is 17 years old, uses his own mower, advertises in the local paper, doesn't have any helpers...is John a household employee?
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Re: Roth IRA for a minor child?

Post by Spirit Rider »

You are still missing the point. I never said someone "couldn't" be classified as an independent contractor.

Just like with a business, independent contractor vs. household employee employee is an affirmative action to not be classified as an employee. The default is still to be classified as an employee.

I repeat again, why would a teenager want to jump through hoops to do this and pay unnecessary SE taxes and have to file a tax return. When it is entirely unnecessary and counter-productive.

I suppose if a teenager was a real entrepreneur and thought they could make more money after buying their own equipment, meeting the Behavioral Control, Financial Control and Relationship of the Parties requirements, starting a bonafide business, paying SE taxes, etc... They could do it.

However, that is most definitely not the typical teenager who wants to do a little landscaping/handyman work for some neighbors to earn a few bucks the OP is talking about. Talk about trying to make a mountain out of a molehill.
Last edited by Spirit Rider on Sun May 31, 2020 12:26 am, edited 1 time in total.
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FiveK
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Re: Roth IRA for a minor child?

Post by FiveK »

Spirit Rider wrote: Sun May 31, 2020 12:18 am You are still missing the point. I never said someone "couldn't" be classified as an independent contractor.

Just like with a business, independent contractor vs. household employee employee is an affirmative action to not be classified as an employee. The default is still to be classified as an employee.

I repeat again, why would a teenager want to jump through hoops to do this and pay unnecessary SE taxes and have to file a tax return. When it is entirely unnecessary and counter-productive.
Sure, if the teenager can simply decide "I'm an employee" I agree - there would be no good reason to do otherwise. Is your point that a teenager has that ability?

Even if the teenager fits the example for which the IRS says the person is not a household employee?

And the soccer refs are out of luck (i.e., must be independent contractors) because they aren't working at a household?
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Re: Roth IRA for a minor child?

Post by Spirit Rider »

FiveK wrote: Sun May 31, 2020 12:24 am
Spirit Rider wrote: Sun May 31, 2020 12:18 am You are still missing the point. I never said someone "couldn't" be classified as an independent contractor.

Just like with a business, independent contractor vs. household employee employee is an affirmative action to not be classified as an employee. The default is still to be classified as an employee.

I repeat again, why would a teenager want to jump through hoops to do this and pay unnecessary SE taxes and have to file a tax return. When it is entirely unnecessary and counter-productive.
Sure, if the teenager can simply decide "I'm an employee" I agree - there would be no good reason to do otherwise. Is your point that a teenager has that ability?

Even if the teenager fits the example for which the IRS says the person is not a household employee?

And the soccer refs are out of luck (i.e., must be independent contractors) because they aren't working at a household?
Just like the IRS does not go around questioning a business why someone is classified as an employee, the IRS does not go around questioning why someone is paid as household help. They are routinely just doing the opposite.

Obviously someone not working for a homeowner is not household help, but that doesn't make them automatically an independent contractor. Some leagues may choose to treat them that way, but they could ust as easily hire them as seasonal employees.

Why are you insisting on doing something that is jumping thru hoops and counter-productive.
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FiveK
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Re: Roth IRA for a minor child?

Post by FiveK »

Spirit Rider wrote: Sun May 31, 2020 12:34 am Why are you insisting on doing something that is jumping thru hoops and counter-productive.
Because I see what appears to be a very cut and dried example from an IRS web site that states people using their own equipment to cut multiple lawns are not household employees.

There may well be other official (or at least semi-official) references that would indicate otherwise. Or folks such as yourself may just know "how the system works."

It seems the IRS example is at least problematic. Suggestions on what our intrepid teen entrepreneurs could use as a counterexample?
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Re: Roth IRA for a minor child?

Post by Spirit Rider »

You can do anything counter-productive that you want.The default is always that someone you hire to perform tasks is an employee. Whether that is a business or household help.

The example you quote is anything but cut and dried. You are reading a certainty into something that is just not there.

Not to mention, those are just some examples of employee vs. independent contractor classification requirements. The IRS has extensive guidelines which all presuppose that someone is an employee until affirmatively established otherwise.

It is difficult to reach the threshold to be classified as an independent contractor. It is trivial to prevent that classification.
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Re: Roth IRA for a minor child?

Post by rkhusky »

This guidance from the IRS calls babysitting and lawn mowing self-employment:
https://www.irs.gov/pub/irs-utl/OC-What ... dtaxes.pdf
Earnings you receive from self- employment – including jobs like babysitting and lawn mowing – are subject to income tax.
If you have net income of $400 or more from self-employment, you will have to pay self-employment tax.
Last edited by rkhusky on Sun May 31, 2020 6:47 am, edited 1 time in total.
Helo80
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Re: Roth IRA for a minor child?

Post by Helo80 »

There have been other threads on this subject if you're able to google-fu the search engine to find them. Some parents definitely want to go fishing for "qualified" job income by creating jobs for their private practice and/or household chores for their children.
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dred pirate
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Re: Roth IRA for a minor child?

Post by dred pirate »

mstrcvdstr wrote: Sat May 30, 2020 4:49 pm I set up Roth IRA for both of my children when they were minors. Years ago, farm families had slightly different IRS rules if the kids were working on the family farm. The SE tax did not start until a much higher income.

Non farm income for kids can be reported using 1040 for the kids. When I calculated the tax savings for me (I am in a high tax bracket) by deducting their pay from my farm income vs the cost of SE tax for them plus tax free growth for decades it was worth it for my family. The Roth savings may also be used for college, first home etc.

Yes, the kids did hard work on the ranch!
thanks for the response - I once calculated what my wage was per hour (~$1) and asked for a raise to at least the minnimum wage ($4.25 at the time). My dad's response was "We provide room and board, that is makes up the difference" haha!
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Re: Roth IRA for a minor child?

Post by cherijoh »

FiveK wrote: Sat May 30, 2020 10:25 pm
Spirit Rider wrote: Sat May 30, 2020 10:02 pm It is extremely rare for a teenager to be able to be properly classified as an independent contractor. They can almost never be considered to have the Behavioral Control, Financial Control and Relationship of the Parties necessary.
Without getting into the definition of rare here, would teenagers who
- advertise themselves as lawn mowers for hire in the local paper, or
- referee soccer (or other) games for pay
be properly classified as independent contractors?
With respect to referreeing for some kind of league, I would expect that to be considered 1099-MISC income. I am not a tax-professional, but was treasurer for a local chapter of a national professional organization and was responsible for arranging payments to service vendors. The group had non-profit status - as I would expect a sports league to have.

Our chapter was required to report any cash payments in excess of $100 (IIRC) to our parent organization (which handled sending out 1099s at tax time) for anyone providing services to our chapter. The IRS required 1099's be issued for $600 or more, but the national org was concerned that some vendors might be providing services to more than one chapter and the parent organization might run afoul of the IRS if they used the $600 threshold for reporting by the individual chapters.

I know from experience doing some consulting while I was working on my MS, that if you don't get a 1099 (because it is below the income threshold) you are still required to report the income on your taxes as self-employment income. At that time at least, there was an easy short form for self-employment income which would walk you through whether you owed self-employment taxes. IMO it would definitely be worth doing this to document income to match a Roth contribution. Plus it is the legal way to do it.

EDITED TO ADD: Per Spirit Rider's comment, if the league is treating them as a seasonal employee, then it would issue a W-2 so there would be no question that the minor child had the income to make a Roth contribution. But my point is that if it is below the threshold for requiring a 1099-MISC and one isn't issued, it would still be eligible income.
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Re: Roth IRA for a minor child?

Post by Spirit Rider »

Any competent tax lawyer I have dealt with in the last 40 years has always maintained that the facts and circumstances are what matter. You have obviously searched far and wide for your untenable absolutism creed.
rkhusky wrote: Sun May 31, 2020 6:38 am This guidance from the IRS calls babysitting and lawn mowing self-employment:
https://www.irs.gov/pub/irs-utl/OC-What ... dtaxes.pdf

Earnings you receive from self- employment – including jobs like babysitting and lawn mowing – are subject to income tax
If you have net income of $400 or more from self-employment, you will have to pay self-employment tax.
The key word here if IF.

Demonstrating current IRS enforcement of what constitutes self-employment is this section in the Final Section 199A regulations, page 13 issued on 1/15/2019.
  • "In Higgins v. Commissioner, 312 U.S. 212 (1941), the Supreme Court noted that determining whether a trade or business exists is a factual determination."
For this factual determination reference IRS Fact Sheet 2017-09 Understanding Employee vs. Contractor Designation.

It is entirely based in the Behavioral Control, Financial Control and Relationship of the Parties. It is is a very high hurdle for a homeowner to to classify a teenage babysitter or lawn mover as an independent contractor eligible for self-employment.

A teenager babysitter watching the children in their home is almost certainly a household employee. A teenager cutting a homeowners lawn with the homeowner's lawn mover is almost certainly a household employee. You linked snippet has no impact on this. Can babysitting or a lawn care services be self-employment, sure. Must they be, absolutely not.

My main point with FiveK as I have repeatedly said. It is counter-productive to jump through hoops to be self-employed and pay SE taxes, when by default you are assumed to be household help and pay no FICA taxes.
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Re: Roth IRA for a minor child?

Post by Spirit Rider »

cherijoh wrote: Sun May 31, 2020 9:44 am With respect to referreeing for some kind of league, I would expect that to be considered 1099-MISC income. I am not a tax-professional, but was treasurer for a local chapter of a national professional organization and was responsible for arranging payments to service vendors. The group had non-profit status - as I would expect a sports league to have.

Our chapter was required to report any cash payments in excess of $100 (IIRC) to our parent organization (which handled sending out 1099s at tax time) for anyone providing services to our chapter. The IRS required 1099's be issued for $600 or more, but the national org was concerned that some vendors might be providing services to more than one chapter and the parent organization might run afoul of the IRS if they used the $600 threshold for reporting by the individual chapters.

I know from experience doing some consulting while I was working on my MS, that if you don't get a 1099 (because it is below the income threshold) you are still required to report the income on your taxes as self-employment income. At that time at least, there was an easy short form for self-employment income which would walk you through whether you owed self-employment taxes. IMO it would definitely be worth doing this to document income to match a Roth contribution. Plus it is the legal way to do it.

EDITED TO ADD: Per Spirit Rider's comment, if the league is treating them as a seasonal employee, then it would issue a W-2 so there would be no question that the minor child had the income to make a Roth contribution. But my point is that if it is below the threshold for requiring a 1099-MISC and one isn't issued, it would still be eligible income.
Interesting that you bring up referees. There has been a raging disagreement for the last 30 or 40 years whether referees should be classified as employees or independent contractors. There are federal/state/local decisions all over the map. The NLRB and the IRS/Federal Courts have ruled both ways, often with the decision hinging on the minutia of tiny details. There have been countless state and local court decisions directing that referees be treated as employees.

I believe it is about 30% of states (with strong educational lobbies) have specifically enacted laws to require referees to be treated as independent contractors. Schools and interscholastic athletic associations are loathe to pay such trivial amounts as W-2 wages. However, just last year the Pennsylvania Interscholastic Athletic Association agreed to pay $260,000 to settle allegations in a class/collective action lawsuit that it misclassified its referees as independent contractors.

This all points strongly to what I have been saying all along. Employee vs. independent contractor classification is always subject to a facts and circumstances determination. You always hear about IRS enforcement and class action lawsuits against misclassification of independent contractors. Do you ever hear anything from anyone challenging employee classification?
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Re: Roth IRA for a minor child?

Post by jacoavlu »

my young teen plans to do some detasseling this summer. I am guessing she’ll end up getting a 1099 for this. We plan to establish a Roth IRA for her as this will be her first earned income.

Clearly I’ll need to do some learning around all this. It would seem to me she’s an employee and not at IC. But there are probably additional rules for farm labor...
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Re: Roth IRA for a minor child?

Post by Spirit Rider »

Even if she is paid for piece work she is almost certainly an employee.

See IRS Publication 51 (Circular A), Agricultural Employer's Tax Guide, Chapter 2, page 9, 2. Who Are Employees?

And Publication 15-A Employer's Supplemental Tax Guide (Supplement to Pub. 15, Employer's Tax Guide), Chapter 2, page 7, Employee or Independent Contractor?
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Re: Roth IRA for a minor child?

Post by jacoavlu »

My assumption was incorrect. Her paperwork for application includes a W-4, and some additional items so it is clear she will be considered an employee
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Re: Roth IRA for a minor child?

Post by rkhusky »

Spirit Rider wrote: Sun May 31, 2020 10:01 am Any competent tax lawyer I have dealt with in the last 40 years has always maintained that the facts and circumstances are what matter. You have obviously searched far and wide for your untenable absolutism creed.
Not really. A quick Google search was all it took, although I don't exactly remember the search terms. Probably in the first couple of pages of results. And I don't think families want to hire a tax lawyer to deal with their kids' summer jobs.
Spirit Rider wrote: Sun May 31, 2020 10:01 am
rkhusky wrote: Sun May 31, 2020 6:38 am This guidance from the IRS calls babysitting and lawn mowing self-employment:
https://www.irs.gov/pub/irs-utl/OC-What ... dtaxes.pdf

Earnings you receive from self- employment – including jobs like babysitting and lawn mowing – are subject to income tax
If you have net income of $400 or more from self-employment, you will have to pay self-employment tax.
The key word here if IF.
Right. If they make less than $400, they don't have to pay self-employment tax. But it is still self-employment income.
Here is a bigger "snippet" of the document:
• Many students do odd jobs over the summer to make extra cash. Earnings you receive from self- employment – including jobs like babysitting and lawn mowing – are subject to income tax.

• If you have net income of $400 or more from self-employment, you will have to pay self- employment tax. This pays for your Social Security and Medicare benefits, which are normally paid for by withholding from wages. The self-employment tax is figured on Form 1040, Schedule SE. Net income is the money you earned after any deductions are subtracted, such as business expenses.
Spirit Rider wrote: Sun May 31, 2020 10:01 am Demonstrating current IRS enforcement of what constitutes self-employment is this section in the Final Section 199A regulations, page 13 issued on 1/15/2019.
  • "In Higgins v. Commissioner, 312 U.S. 212 (1941), the Supreme Court noted that determining whether a trade or business exists is a factual determination."
For this factual determination reference IRS Fact Sheet 2017-09 Understanding Employee vs. Contractor Designation.

It is entirely based in the Behavioral Control, Financial Control and Relationship of the Parties. It is is a very high hurdle for a homeowner to to classify a teenage babysitter or lawn mover as an independent contractor eligible for self-employment.

A teenager babysitter watching the children in their home is almost certainly a household employee. A teenager cutting a homeowners lawn with the homeowner's lawn mover is almost certainly a household employee. You linked snippet has no impact on this. Can babysitting or a lawn care services be self-employment, sure. Must they be, absolutely not.

My main point with FiveK as I have repeatedly said. It is counter-productive to jump through hoops to be self-employed and pay SE taxes, when by default you are assumed to be household help and pay no FICA taxes.
You reference is for small businesses, not families or neighbors. And it doesn't mention anything about babysitting or mowing lawns or children's summer jobs.

And there is very little in the way of a hoop to jump through. You collect the income from your neighbors, document it, and pay the SE tax on your tax return.

I've provided an IRS document that calls summer jobs for students, like babysitting and lawn mowing, to be self-employment. Unless you can find a contrary IRS publication or reference that says that these types of jobs are not self-employment, but instead that the children are their neighbor's employees, I consider the matter closed.
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FiveK
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Re: Roth IRA for a minor child?

Post by FiveK »

FiveK wrote: Sun May 31, 2020 12:44 am I see what appears to be a very cut and dried example from an IRS web site that states people using their own equipment to cut multiple lawns are not household employees.
Spirit Rider wrote: Sun May 31, 2020 10:01 amA teenager cutting a homeowners lawn with the homeowner's lawn mover is almost certainly a household employee.
This seems akin to "the sky is blue" vs. "the grass is green". Both are correct. ;)
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unclescrooge
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Re: Roth IRA for a minor child?

Post by unclescrooge »

Spirit Rider wrote: Sun May 31, 2020 10:01 am
My main point with FiveK as I have repeatedly said. It is counter-productive to jump through hoops to be self-employed and pay SE taxes, when by default you are assumed to be household help and pay no FICA taxes.
Can household help open a Roth?

Separate question: I have a home office for my SCorp and receive a 1099 for the rent paid for use of it. It is a solely used for work and meet clients.
If I hire my kid to water the plants in the office and pay them some nominal amount (I was thinking $30/month), would they be considered an employee or can I 1099 them?
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FiveK
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Re: Roth IRA for a minor child?

Post by FiveK »

unclescrooge wrote: Sun May 31, 2020 3:13 pm Can household help open a Roth?
Yes. Compensation as an employee (via W-2) or as a non-employee (via 1099-MISC, soon to be via 1099-NEC) is equivalent in terms of IRA contribution eligibility.
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Re: Roth IRA for a minor child?

Post by Spirit Rider »

rkhusky wrote: Sun May 31, 2020 1:19 pm
Spirit Rider wrote: Sun May 31, 2020 10:01 am
rkhusky wrote: Sun May 31, 2020 6:38 am If you have net income of $400 or more from self-employment, you will have to pay self-employment tax.
The key word here if IF.
Right. If they make less than $400, they don't have to pay self-employment tax. But it is still self-employment income.
"Sigh", I was referring to IF ... from self-employment. No self-employment, no self-employment tax. Nothing in that link means that babysitting or lawnmowing must be self-employment.

Especially since IRS Publication 926 clearly states:
  • You have a household employee if you hired someone to do household work and that worker is your employee.
    ...
    Household work. Household work is work done in or around your home. Some examples of workers who do household work are:
    • Babysitters,
    • ...,
    • Yard workers
rkhusky wrote: Sun May 31, 2020 1:19 pm You reference is for small businesses, not families or neighbors. And it doesn't mention anything about babysitting or mowing lawns or children's summer jobs.
This has to be your most specious argument yet. Whether the employer/client of someone who should be classified as an employee or can be classified as an independent contractor is a homeowner or business is totally irrelevant to the determination. Since you nitpicked the previous reference, let's use a more exhaustive one.

Publication 15-A Employer's Supplemental Tax Guide (Supplement to Pub. 15, Employer's Tax Guide), Chapter 2, page 7, Employee or Independent Contractor?
rkhusky wrote: Sun May 31, 2020 1:19 pm I've provided an IRS document that calls summer jobs for students, like babysitting and lawn mowing, to be self-employment. Unless you can find a contrary IRS publication or reference that says that these types of jobs are not self-employment, but instead that the children are their neighbor's employees, I consider the matter closed.
Since your "so-called" reference is a 420 word top level dispatch from the Media Relations Office (hardly something to be relied upon) and Publication 926 clearly states that by default Babysitters and Yardworkers are employees. I also consider the matter closed.
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Re: Roth IRA for a minor child?

Post by Spirit Rider »

FiveK wrote: Sun May 31, 2020 2:18 pm
FiveK wrote: Sun May 31, 2020 12:44 am I see what appears to be a very cut and dried example from an IRS web site that states people using their own equipment to cut multiple lawns are not household employees.
Spirit Rider wrote: Sun May 31, 2020 10:01 amA teenager cutting a homeowners lawn with the homeowner's lawn mover is almost certainly a household employee.
This seems akin to "the sky is blue" vs. "the grass is green". Both are correct. ;)
If they meet the IRS guidelines to be classified as an IC, not just "use their own equipment". That is the exact point I have been making all along. Remember, this is a total facts and circumstances determination.

Are their babysitting and landscaping businesses, obviously. However, most individual teenagers babysitting in the owners home or doing yard work should properly be classified as household help employees.

The reality is that most homeowners don't know and don't care and nor should they. They have no need to write contracts, ensure the teenager meets the IC guidelines and issue a 1099 to be classified as an IC. They have no need to run payroll to deduct FICA, withhold income taxes and file a W-2 for them by default to be considered household help as long as the teenager is < age 18 and a student or if not a student or >= age 18, they are under the FICA/FUTA wage requirements.

In fact most homeowners have been treated this as "under-the-table" when in reality it is not. It is perfectly legitimate household employment that routinely requires no reporting and taxes for most individuals. A teenager can certainly file an unnecessary Schedule C, Schedule SE, pay SE taxes and file a tax return if they wish.
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Re: Roth IRA for a minor child?

Post by retired@50 »

Spirit Rider wrote: Sun May 31, 2020 4:31 pm
If they meet the IRS guidelines to be classified as an IC, not just "use their own equipment". That is the exact point I have been making all along. Remember, this is a total facts and circumstances determination.

Are their babysitting and landscaping businesses, obviously. However, most individual teenagers babysitting in the owners home or doing yard work should properly be classified as household help employees.

The reality is that most homeowners don't know and don't care and nor should they. They have no need to write contracts, ensure the teenager meets the IC guidelines and issue a 1099 to be classified as an IC. They have no need to run payroll to deduct FICA, withhold income taxes and file a W-2 for them by default to be considered household help as long as the teenager is < age 18 and a student or if not a student or >= age 18, they are under the FICA/FUTA wage requirements.

In fact most homeowners have been treated this as "under-the-table" when in reality it is not. It is perfectly legitimate household employment that routinely requires no reporting and taxes for most individuals. A teenager can certainly file an unnecessary Schedule C, Schedule SE, pay SE taxes and file a tax return if they wish.
I find the back and forth fascinating but it leads me to a couple of questions.

If I'm a teenager and I earn $2,000 by babysitting or clipping grass, where does my income get reported? My parents return, my own return? I'm presuming I would need to report this income someplace if I intend to open a Roth IRA based on that $2,000 of income.

If the people who hired me didn't put me down as a household employee on their tax returns, then are they exposed to some sort of risk of audit?

Regards,
This is one person's opinion. Nothing more.
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FiveK
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Re: Roth IRA for a minor child?

Post by FiveK »

retired@50 wrote: Sun May 31, 2020 5:53 pm If I'm a teenager and I earn $2,000 by babysitting or clipping grass, where does my income get reported? My parents return, my own return?
Your own return, if you have a filing requirement, would likely be best.
I'm presuming I would need to report this income someplace if I intend to open a Roth IRA based on that $2,000 of income.
No need to file if you don't have a filing requirement, but you may still use the compensation to support the IRA contribution. Just keep a record of the earnings for the minuscule chance you would be audited for it.
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unclescrooge
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Re: Roth IRA for a minor child?

Post by unclescrooge »

FiveK wrote: Sun May 31, 2020 6:02 pm
retired@50 wrote: Sun May 31, 2020 5:53 pm If I'm a teenager and I earn $2,000 by babysitting or clipping grass, where does my income get reported? My parents return, my own return?
Your own return, if you have a filing requirement, would likely be best.
I'm presuming I would need to report this income someplace if I intend to open a Roth IRA based on that $2,000 of income.
No need to file if you don't have a filing requirement, but you may still use the compensation to support the IRA contribution. Just keep a record of the earnings for the minuscule chance you would be audited for it.
Thanks!
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Re: Roth IRA for a minor child?

Post by rkhusky »

retired@50 wrote: Sun May 31, 2020 5:53 pm
If I'm a teenager and I earn $2,000 by babysitting or clipping grass, where does my income get reported? My parents return, my own return? I'm presuming I would need to report this income someplace if I intend to open a Roth IRA based on that $2,000 of income.
The brokerage will report the Roth contribution to the IRS. They could easily check to see if taxable compensation was reported. I would file a tax return, even if no tax due.
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Re: Roth IRA for a minor child?

Post by Spirit Rider »

rkhusky wrote: Sun May 31, 2020 8:40 pm
retired@50 wrote: Sun May 31, 2020 5:53 pm If I'm a teenager and I earn $2,000 by babysitting or clipping grass, where does my income get reported? My parents return, my own return? I'm presuming I would need to report this income someplace if I intend to open a Roth IRA based on that $2,000 of income.
The brokerage will report the Roth contribution to the IRS. They could easily check to see if taxable compensation was reported. I would file a tax return, even if no tax due.
Even though the IRS could, I have never heard of them doing so with that information in 22 years. Even if IRS contacted the taxpayer about the lack of reported compensation, all that would be necessary is to provide contemporaneous documentation of that compensation. If the teenager wanted to prevent this extremely unlikely occurrence, they could file a tax return even though they would have no filing requirement.

However for the 2009 tax year, I had my 18 year old daughter file a tax return to document the ~=$500 wages she received. Since she received < $600 in wages no W-2 was filed. I thought filing a return was the best way to document the compensation.

Since the tax software would not file a return with no filing requirement, tax refund of withholding or refundable credits, a manual return was filed. Much to her and my surprise, the IRS sent her a letter stating no return was required or justified, please don't waste our time with an unnecessary return again.
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Re: Roth IRA for a minor child?

Post by rkhusky »

Spirit Rider wrote: Sun May 31, 2020 9:45 pm However for the 2009 tax year, I had my 18 year old daughter file a tax return to document the ~=$500 wages she received. Since she received < $600 in wages no W-2 was filed. I thought filing a return was the best way to document the compensation.

Since the tax software would not file a return with no filing requirement, tax refund of withholding or refundable credits, a manual return was filed. Much to her and my surprise, the IRS sent her a letter stating no return was required or justified, please don't waste our time with an unnecessary return again.
I'll see if I get the same response when our child does this in a few years.
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Re: Roth IRA for a minor child?

Post by Spirit Rider »

rkhusky wrote: Mon Jun 01, 2020 6:25 am
Spirit Rider wrote: Sun May 31, 2020 9:45 pm However for the 2009 tax year, I had my 18 year old daughter file a tax return to document the ~=$500 wages she received. Since she received < $600 in wages no W-2 was filed. I thought filing a return was the best way to document the compensation.

Since the tax software would not file a return with no filing requirement, tax refund of withholding or refundable credits, a manual return was filed. Much to her and my surprise, the IRS sent her a letter stating no return was required or justified, please don't waste our time with an unnecessary return again.
I'll see if I get the same response when our child does this in a few years.
I think they will be fine if the return is filed electronically.

I wonder if this notice was an IRS attempt to stop getting unnecessary paper returns. Likely, if I had her file using Free File Fillable Forms she wouldn't have received the notice. I'm pretty sure my youngest and countless others won't get such a letter for their 2019 tax returns.

I had her use Free File Fillable Forms to file a $1 tax return with refund routing and account number information. I did this based on early reports in the press. She received direct deposit of her stimulus payment in the first group.

There really is no good reason for people to file paper forms unless in their unique circumstances, they need a form FFFF doesn't support.

Although, there is a small, but non-trivial number of Bogleheads who refuse to file electronically. Of course, many of them are in tax return/stimulus payment hell this year, because the IRS stopped processing paper tax returns months ago.
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FiveK
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Re: Roth IRA for a minor child?

Post by FiveK »

rkhusky wrote: Mon Jun 01, 2020 6:25 am
Spirit Rider wrote: Sun May 31, 2020 9:45 pm However for the 2009 tax year, I had my 18 year old daughter file a tax return to document the ~=$500 wages she received. Since she received < $600 in wages no W-2 was filed. I thought filing a return was the best way to document the compensation.

Since the tax software would not file a return with no filing requirement, tax refund of withholding or refundable credits, a manual return was filed. Much to her and my surprise, the IRS sent her a letter stating no return was required or justified, please don't waste our time with an unnecessary return again.
I'll see if I get the same response when our child does this in a few years.
Some years back our then 13 year old had a bunch of odd jobs (referee, fill-in newspaper carrier, etc.) with only ~$300 income. Although it wasn't required, it seemed as good a time as any to introduce Form 1040. The IRS (at least, TurboTax's interpretation) would not accept an electronic return due to age and being a first time filer. No complaints back from the IRS about that paper filing.
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Re: Roth IRA for a minor child?

Post by rkhusky »

FiveK wrote: Mon Jun 01, 2020 2:17 pm
rkhusky wrote: Mon Jun 01, 2020 6:25 am
Spirit Rider wrote: Sun May 31, 2020 9:45 pm However for the 2009 tax year, I had my 18 year old daughter file a tax return to document the ~=$500 wages she received. Since she received < $600 in wages no W-2 was filed. I thought filing a return was the best way to document the compensation.

Since the tax software would not file a return with no filing requirement, tax refund of withholding or refundable credits, a manual return was filed. Much to her and my surprise, the IRS sent her a letter stating no return was required or justified, please don't waste our time with an unnecessary return again.
I'll see if I get the same response when our child does this in a few years.
Some years back our then 13 year old had a bunch of odd jobs (referee, fill-in newspaper carrier, etc.) with only ~$300 income. Although it wasn't required, it seemed as good a time as any to introduce Form 1040. The IRS (at least, TurboTax's interpretation) would not accept an electronic return due to age and being a first time filer. No complaints back from the IRS about that paper filing.
I would only file if we also decided to do a Roth contribution, which I would lean towards doing, or to pay SE tax.
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Re: Roth IRA for a minor child?

Post by BrandonBogle »

dred pirate wrote: Sat May 30, 2020 1:27 pm 3. Finally, lets say my child makes 3k. Can I put the full 3k into a Roth IRA for them? Since they won't clear the full 3k (payroll taxes, etc) - can I still "match" their income and put 3k into the Roth?
My first Roth IRA is from when I was 13 or 14 for a summer job. It was cheaper on my family to be with my mom at her job 2-3 days a week and I was already a computer nerd there. So for those 2-3 days for 5-6 out of her 8 hours, I was on the clock and paid.

Her employer was an amazing person and really looked out for her employees. So not only did she not have a problem with this, she also was the one to tell my mom about the IRA and suggested it get opened for the full amount. At the time, that was $2k or something like that. So we went through the process where a put all my earned income into the IRA and my mom gifted my allowance the money I had earned. The employer gave my mom that gift as a bonus for Christmas to not affect the family finances. I think I still have that W2 somewhere around here!
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FiveK
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Re: Roth IRA for a minor child?

Post by FiveK »

rkhusky wrote: Mon Jun 01, 2020 3:20 pm
FiveK wrote: Mon Jun 01, 2020 2:17 pm Some years back our then 13 year old had a bunch of odd jobs (referee, fill-in newspaper carrier, etc.) with only ~$300 income. Although it wasn't required, it seemed as good a time as any to introduce Form 1040. The IRS (at least, TurboTax's interpretation) would not accept an electronic return due to age and being a first time filer. No complaints back from the IRS about that paper filing.
I would only file if we also decided to do a Roth contribution, which I would lean towards doing, or to pay SE tax.
Yes, a Roth contribution was made. :)

In a subsequent year, compensation was also below the filing requirement so no filing occurred but Roth contribution did occur. Records exist in the unlikely event it ever becomes an issue, but no complaints from the IRS to this point.
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