HELP!!!--Custodial Roth; hiring child to work on rental property (sole proprietor; individually owned; Schedule E) taxes

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HELP!!!--Custodial Roth; hiring child to work on rental property (sole proprietor; individually owned; Schedule E) taxes

Postby Poster » Sun Apr 16, 2017 4:07 pm

I've read several posts that are under this general topic (like here: https://www.bogleheads.org/forum/viewtopic.php?t=210180) and researched this for hours elsewhere, but I'm still stuck...seems none of the other posts really combine these issues. At this point I think if anyone can help me navigate this, it's the bogleheads!

My child of 13 is a smart kid and pretty industrious. She has worked for us with our rental property (cleaning, weeding, office work, helping communicate with guests). We've been doing pretty well with it an need the help as we've started renting it on airbnb about 2 years ago, and often have 8 guests churn through per month. All told we've paid her around $300 to $600/month depending on the month -- she's accumulated $5525 for 2016 this way. She also gathered about $400 more babysitting for a couple of neighbors.

This is our one and only rental, and dad owns it as an individual (not LLC or corporation - I have umbrella insurance instead), so we've always just filed our taxes with Schedule E. As I understand it, that's like running a business as a sole proprietor, but for a rental a Schedule C's not required.

I've also read that it's fine to hire your kid (or even spouse) as an employee and pay them for helping you with running a rental, so long as the work and pay's considered reasonable, and kept track of. I have it all written down and could easily formalize it more.
However, articles about this seem to either:
(1) assume your rental property is under an LLC and As a sole proprietor as I am, you can apparently issue a W2 or 1099-misc to your kid(?) (I've never done so) or
(2) consider the child as a "household employee" because they're helping you with stuff within the family beyond normal chores.
#2 seems easier to me, but "household employee's" once you get past $2,000 for the year, our taxact software raises the red flag...it gets into the whole "nanny tax" issue (and I'd need to issue forms for her pay), but then, those same articles don't seem to delve into the issue that apparently none of that applies if it's my own kid under age 18, but I don't see any way to point out that nuance on her taxes...the IRS technically doesn't seem to put any limit on what you could pay your own child as a "household employee", although over $6,300 they'd be paying taxes.

My understanding is she wouldn't have to pay income tax since the total income is <$6,300, but she might have to pay some self-employment tax (social security and medicare of around 14% I think).

I'm not a tax-evader type - I really want everything documented legitimately. I've never been audited, and would prefer not to start now - I can certainly document all her work/pay, but I assume audits are a huge hassle and can waste many hours of one's life. I also don't want her to pay a penny more in taxes than required.

I also like to do my own taxes, but get totally tripped up on stuff like this (flashbacks to "backdoor Roth" PTSD). I just think I'm a relatively smart guy and am willing to put in the hours to file my own taxes - I think all Americans should have that option and not be forced to wave the white flag and hire a CPA. Oh, and I did ask a local enrolled agent and he frankly didn't know that much about it (probably doesn't get this question much) but generally didn't think it'd be worth the effort of claiming any of this stuff.

I also already started her custodial Roth with this income (I gifted her the equivalent amount to enjoy the fruits of her labor).

For now I'm filing an extension :)
Last edited by Poster on Thu Apr 20, 2017 7:32 am, edited 2 times in total.

Spirit Rider
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Re: HELP!!!--Custodial Roth; hiring child to work on rental property (sole proprietor; individually owned; Schedule E) t

Postby Spirit Rider » Sun Apr 16, 2017 5:40 pm

With this fact pattern there is no other way to characterize this than she is your W-2 employee. There is no way you can justify characterizing her as a Independent Contractor / self employed and she isn't even remotely a household employee.

You should have been paying her as an employee all along. If you had a single member LLC, you would still file a schedule E. Either way she would be required to be a W-2 employee. The LLC or not is a non-issue

The $5525 looks like an awful suspicious amount, but if you want to make contributions for 2016, you have two days to do it. Regardless if you are filing an extension or not, you need to make the 2016 contribution before 4/18. You can always remove it before 10/16/17 if it isn't allowed.

I you had been paying her all along using a payroll service or making proper filings and payments for tax/FICA, I would say you don't need a CPA or other accounting and tax professionals. The fact you are where you are at this late date demonstrates you really do need professional help. I'm not sure how you would correct this mess or if it is even possible to correct wages that were never paid in 2016. You need a professional involved in this.

I wouldn't bother with the babysitting money. For $400, you got much bigger problems to worry about.

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ebotrd
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Re: HELP!!!--Custodial Roth; hiring child to work on rental property (sole proprietor; individually owned; Schedule E) t

Postby ebotrd » Sun Apr 16, 2017 6:28 pm

Wow. Sounds like she would've been better off spending all that time babysitting and mowing lawns - she could've just filed Schedule C-EZ and SE herself and been done with it.
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Re: HELP!!!--Custodial Roth; hiring child to work on rental property (sole proprietor; individually owned; Schedule E) t

Postby JGoneRiding » Sun Apr 16, 2017 10:58 pm

I am not a cap etc etc. But I do know there are special rules for employing your child that affect fica etc, also min wage you can pay your kid a lot less and are allowed to employ your 13 yr old were ever one else would not be able to.

Maybr start with the family farm rules of employment there should be a lot of info there

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Re: HELP!!!--Custodial Roth; hiring child to work on rental property (sole proprietor; individually owned; Schedule E) t

Postby Poster » Sun Apr 16, 2017 11:23 pm

Thanks for the help. As I've never had a reason to issue a W2 (or 1099) I'm not familiar with how I'd do that. Why would I need a "single member LLC"? Can't my sole proprietorship issue a W2? I guess I'd need to get the timesheets organized, get an EIN, issue W2, W4, 941, and 940 (even though exempt). Does that sound right? I'll bet I could handle it. I thought issuing her a W2 would automatically require me to file as a Schedule C but I guess I can just record it under "other expenses" on Schedule E. If it's truly too late I suppose we could just get it going for 2017.

I don't suppose there's some way for a person to pay a penalty and file a W2 late?

From reading various sites and the various ways she's been helping I think we'd be fine couching $2,000 ($1,999?) of it as "household employee". We'd need the other $3,500-ish as W2 income though to do this right. The sad thing is I really don't care about a tax deduction for me as an expense on the rental...we're just jazzed to finally open her Roth.

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Re: HELP!!!--Custodial Roth; hiring child to work on rental property (sole proprietor; individually owned; Schedule E) t

Postby Watty » Sun Apr 16, 2017 11:28 pm

Poster wrote:My child of 13 is a smart kid and pretty industrious.


Be sure to look into your state's child labor laws. There are lots restrictions on the hours they can work and safety requirements.

Your insurance company may also have issues with having under age employees.

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Re: HELP!!!--Custodial Roth; hiring child to work on rental property (sole proprietor; individually owned; Schedule E) t

Postby JGoneRiding » Sun Apr 16, 2017 11:35 pm

There are a lot of exception s when it is your child. Totally different then highering someone elses

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Re: HELP!!!--Custodial Roth; hiring child to work on rental property (sole proprietor; individually owned; Schedule E) t

Postby Spirit Rider » Mon Apr 17, 2017 1:41 am

You were the one who raised the possible LLC issue, I was just saying it was irrelevant. Yes, a sole proprietorship can pay a W-2 employee. Probably millions of people are employed in sole proprietorships.

You really would be bettor off with a payroll service going forward. Sometimes trying to do everything yourself just isn't worth it. I'm still of the opinion that you should engage a professional to try to sort out 2016.

I still don't see how it would even remotely fly to claim your 13 year old daughter as a "household employee".

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Watty
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Re: HELP!!!--Custodial Roth; hiring child to work on rental property (sole proprietor; individually owned; Schedule E) t

Postby Watty » Mon Apr 17, 2017 7:45 am

JGoneRiding wrote:There are a lot of exception s when it is your child. Totally different then highering someone elses


I agree that there are a likely a lot of special rules when it is your kid but there will still be rules that apply and that will vary by state.

An additional consideration would be that taxes for Social Security and Medicare would need to be withheld so the comment about using a payroll service makes a lot of sense. There may be unemployment taxes too. If they are ever audited then not having those withheld in prior years could be an issue.

A couple of other concerns;

Poster wrote:renting it on airbnb


Airbnb people often don't get all the needed business licences and that requirement varies a lot by location.

Poster wrote:owns it as an individual (not LLC or corporation - I have umbrella insurance instead)


I would assume that the insurance company knows that it is being used as a rental and not just as a second second home.

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Re: HELP!!!--Custodial Roth; hiring child to work on rental property (sole proprietor; individually owned; Schedule E) t

Postby Spirit Rider » Mon Apr 17, 2017 8:58 am

FICA is not required for children employed in a parent's business until age 18. FUTA is not required until age 21.

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Re: HELP!!!--Custodial Roth; hiring child to work on rental property (sole proprietor; individually owned; Schedule E) t

Postby Indigorain » Mon Apr 17, 2017 9:16 am

I believe that as its a sole proprietor, this will be much easier for you then if you have a llc. You don't have to deal with fuca and fuca taxes. I don't know if you must generate a w2 or not.

See this link to substantiate the fica exemption.
https://www.irs.gov/businesses/small-bu ... amily-help

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Re: HELP!!!--Custodial Roth; hiring child to work on rental property (sole proprietor; individually owned; Schedule E) t

Postby Indigorain » Mon Apr 17, 2017 9:24 am

I did more reading in this. If you pay your child as a 1099 contractor, they will owe self employment taxes (the exemption is only for the first 400 in income). So you definitely need to go with the w2 employee payment option. I do this for my nanny, and don't pay a payroll service. You won't have to file fuca, or pay in fica, so it's not that hard. There will be paperwork involved though, and you still need to file the w2 just as you would with any employee.

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Re: HELP!!!--Custodial Roth; hiring child to work on rental property (sole proprietor; individually owned; Schedule E) t

Postby Spirit Rider » Mon Apr 17, 2017 9:28 am

An LLC is a state chartered business entity, not a IRS tax entity. By default they are either a sole proprietorship or partnership. Which if the parent(s) are the sole owners, no FICA/FUTA is required for children under 18/21. Again the LLC issue is irrelevant.

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Re: HELP!!!--Custodial Roth; hiring child to work on rental property (sole proprietor; individually owned; Schedule E) t

Postby agnielson » Mon Apr 17, 2017 11:06 am

Hi Poster:

You're definitely getting into an area of tax law that is full of nuance, but fortunately I think it's simpler than you may fear. If I was your tax preparer (but I'm not!), here's what I would do and what materials I would rely upon:

  • Deduct your daughter's wages on line 7 of Schedule E. Looking at the instructions, there isn't even a section to add further information for that line, so based on the line description's self-evident nature and your narrative about her work, I would put the amount there.
  • Do not withhold Social Security and Medicare Taxes. See https://www.irs.gov/businesses/small-businesses-self-employed/family-help in the "Child employed by parents" section for why.
  • I would suggest issuing a W-2 to your daughter for documentation purposes. In box 1, put in the amount you pay her for her wages with the rental property, but leave boxes 3 through 6 blank. Run a pro forma return for your daughter to see if any income taxes would be due, then withhold the appropriate amount via EFTPS and fill in box 2 as necessary.
  • Do not issue her a 1099 form. That will signal to the IRS and the tax software to withhold self employment taxes, which negates the advantages discussed on the IRS page linked above.
  • Do not treat her as a household employee. See https://www.irs.gov/pub/irs-pdf/p926.pdf, particularly page 5, list item 4 where it says "If the employee is a student, providing household services isn't considered to be his or her principal occupation.", which negates the negation to the exception (go figure)
  • Yeah, you'll probably have to submit forms 940 and 944, even if all the amounts are zero. Better safe than sorry, but they're pretty simple.
  • Please don't hire a payroll service for this. I bet your situation will confuse their small minds and you'll end up spending more time sorting it back out than it would take to learn and fill out the forms on your own.
I think it's awesome that you're getting your daughter started so young and I'm hopeful that she will appreciate your efforts in years to come. There is a bit of a learning curve with all of this, but millions of people figure it out everyday, so I'm willing to bet you will too. Good luck!

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Re: HELP!!!--Custodial Roth; hiring child to work on rental property (sole proprietor; individually owned; Schedule E) t

Postby Poster » Mon Apr 17, 2017 9:51 pm

Thanks again for the input everyone!

Spirit Rider:
Payroll service...you really do need professional help.

...I was thinking I could learn how to do payroll for one person. I did successfully complete 24 years of schoolin'. If not, it looks like Zenefits does payroll for ~$8/month.
I still don't see how it would even remotely fly to claim your 13 year old daughter as a "household employee.
...I thought work such as babysitting (sometimes she simply babysits for our toddler son so we can focus on work!), gardening & minor repairs, cleaning projects (like wash cars, clean out garage, spring cleaning), and "non-rental" office work at our personal residence would all qualify as a "household employee"? She did a lot of that too. I know folks quibble over the fact that "chores"/allowance don't count, and how to define "chores". She does do the dishes, take out the trash, help with day-to-day cleanup as "chores".

agnielson:
--Thanks for the vote of confidence! Would the IRS itself not support the notion of Joe Taxpayor/the American public at least trying to understand the tax code enough to file their own taxes?...or are they already just puppets of the tax lobby?

Deduct your daughter's wages on line 7 of Schedule E.

...I've read a few other places to put it on line 21 as "other expenses", although I assume it really doesn't matter much in the end because aren't those deductions all worth the same anyway (my 25% tax bracket)? Plus Line 7 says "cleaning and maintenance" which is part of what she did. She also helped with some repairs and advertising. Also some office work and attending to guests needs by phone/text/email (which I guess would be "management fees"). I could divide it up among the various lines, but again probably the total paid is what really matters.

Do not withhold Social Security and Medicare Taxes.

...I agree, page 3 of IRS Pub 15 seems to say the same (link below).

I would suggest issuing a W-2 to your daughter

...Would you think I can go ahead and issue her 2016 W2 still? I read that they can be issued late with a penalty of $100 nowadays.
In my reading, it looks like any W2 should have a W3 issued (to SSA), and a W4 (that would be from my daughter), but didn't see additional late penalties for those. It looks like late 940 and 944 would not incur a penalty in this case since they'll amount to $0.

I assume all still agree it's too late to get my ducks in a row with the W2 issue for tax year 2016, correct? I read those would need to be in by 1/31 the following year, or late FEB at the latest.

Do not treat her as a household employee

...This link seems to interpret that Pub 926 reference with the exact opposite conclusion(??):
http://www.maybergcpa.com/faq-thenannytaxrules.php. There a reader asks, "If I hire teenagers as babysitters or for yard work, must I withhold and pay tax for them?"...ANSWER: "When figuring whether you paid an employee $2,000 or more in 2017 to babysitters or others, you generally don't count wages paid to an employee who is under age 18 at any time during the year.....If the employee is a student, providing household services is not considered his or her principal occupation. However, you should count these wages if providing household services is the employee's principal occupation."

Please don't hire a payroll service for this. I bet your situation will confuse their small minds.

...I agree...I work for the government ;)
I will try to figure it out myself. Please advise if you know a good link for a newbie to learn it.
I found https://www.youtube.com/watch?v=iWuTjwAROXs to start. Doesn't seem all that hard, though I'm sure I'll have some questions. Like on the 940, has "Payments exempt from FUTA tax"...I assume I'd choose 4e "Other"(?).
_____________________________
Pub 15 https://www.irs.gov/pub/irs-pdf/p15.pdf
Child employed by parents. Payments for the services of a child under age 18 who works for his or her parent in a trade or business aren't subject to social security and Medicare taxes ....if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child. If these payments are for work other than in a trade or business, such as domestic work in the parent's private home, they’re not subject to social security and Medicare taxes until the child reaches age 21. However, see Covered services of a child or spouse, later. Payments for the services of a child under age 21 who works for his or her parent, whether or not in a trade or business, aren't subject to FUTA tax.
......Payments for the services of a child of any age who works for his or her parent are generally subject to income tax withholding unless the payments are for domestic work in the parent's home, or unless the payments are for work other than in a trade or business and are less than $50 in the quarter or the child isn't regularly employed to do such work

agnielson
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Re: HELP!!!--Custodial Roth; hiring child to work on rental property (sole proprietor; individually owned; Schedule E) t

Postby agnielson » Tue Apr 18, 2017 9:34 pm

Poster wrote:I thought work such as babysitting (sometimes she simply babysits for our toddler son so we can focus on work!), gardening & minor repairs, cleaning projects (like wash cars, clean out garage, spring cleaning), and "non-rental" office work at our personal residence would all qualify as a "household employee"?


I don't have the Tax Court reference handy, but I seem to recall some commentary about the court taking a dim view towards chores-like work being contorted into a for-hire relationship. Basically, it's understood that all kids should do some work around the house to "pull their weight". Of course that is a different context than your rental property.

Poster wrote:I've read a few other places to put it on line 21 as "other expenses", although I assume it really doesn't matter much in the end because aren't those deductions all worth the same anyway (my 25% tax bracket)? Plus Line 7 says "cleaning and maintenance" which is part of what she did. She also helped with some repairs and advertising. Also some office work and attending to guests needs by phone/text/email (which I guess would be "management fees"). I could divide it up among the various lines, but again probably the total paid is what really matters.


I would choose whichever line description covers your daughter's main duties and deduct 100% of the amount there. It would be administratively prohibitive to allocated the hours/amounts to each item as outlined. Furthermore, I believe management fees would generally cover a property manager's fee, which is somebody in that professional. Again, I would argue your daughter's main profession is "student".

Poster wrote:Would you think I can go ahead and issue her 2016 W2 still? I read that they can be issued late with a penalty of $100 nowadays.
In my reading, it looks like any W2 should have a W3 issued (to SSA), and a W4 (that would be from my daughter), but didn't see additional late penalties for those. It looks like late 940 and 944 would not incur a penalty in this case since they'll amount to $0.


Yes and throw yourself at their mercy if they ever come around for that penalty. I helped someone file an S corporation election in October for the current year, explained that it was an oversight, and it was granted without so much as a grumble. You'll be fine.

Poster wrote:This link seems to interpret that Pub 926 reference with the exact opposite conclusion(??): ... If the employee is a student, providing household services is not considered his or her principal occupation. (emphasis mine)


I think Publication 926, this link and my interpretation all agree, unless your daughter is not attending a school of some kind.

Poster wrote:Payments exempt from FUTA tax"...I assume I'd choose 4e "Other"(?)


Yes, put your daughter's wages in boxes 3 and 4, for a net of zero on line 7.

Poster wrote:Please advise if you know a good link for a newbie to learn it.


I was going to be snarky and link to the IRS website, but really it's the best primary resource. I've found that I need to read each section and publication three times before it really sinks in, but it eventually makes it's way into your brain (of course pushing out a prized memory in the process).

Poster
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Re: HELP!!!--Custodial Roth; hiring child to work on rental property (sole proprietor; individually owned; Schedule E) t

Postby Poster » Tue Apr 18, 2017 11:01 pm

Pure gold, agnielson! Thanks. I think I can get this started.

I think I understand most of what you're getting at with Pub 926, except for one thing - I understood it as, if she's a student (she is), then household employee can't also be her "principle occupation". But, I read this as..."therefore, since her principle occupation isn't household employee, she would not be taxed even if you paid her over $2,000 that year (until she made over $6,300)". I guess you're saying I shouldn't interpret it that way. There's a line somewhere about household employees that you "don't count" wages over $2,000 for your own child under age 21. Also Pub 15 says "Payments for the services of a child of any age who works for his or her parent are generally subject to income tax withholding unless the payments are for domestic work in the parent's home,..." So doesn't that mean one's own child can be hired as a household employee? In my mind her serving as babysitter to her little bro is beyond typical "chores".

This might be related to the chores reference you speak of: http://tomcopelandblog.com/dont-count-chores-when-hiring-your-own-children

Anyway, not a big deal...I'll stay away from that and go forward with compensating for working in our rental business.

agnielson
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Re: HELP!!!--Custodial Roth; hiring child to work on rental property (sole proprietor; individually owned; Schedule E) t

Postby agnielson » Wed Apr 19, 2017 10:34 am

There are multitude of concepts coming into play in this situation, so it can be a little difficult to untangle the mess and make sense of it. I apologize in advance for the repetition in my response, but I only do so for your and others' benefit:

  • Taxpayers that hire people to perform household work (examples typically include cooking, cleaning, yard work, child care, etc.) are required to file Schedule H. This form attempts to streamline the process of accounting for and paying Federal Income, Social Security, Medicare and FUTA taxes, as may be required per the instructions for Schedule H.
  • Since your daughter's principle occupation is predetermined to be that of a student, she cannot be treated as a household employee by anyone, and therefore no one should file a Schedule H for her work as it pertains to household labor (e.g. babysitting, yard work, etc.)
  • Moving on, she should be treated as an employee for Schedule E purposes as it relates to your property rental. This business-related activity is no different than if she worked for an unrelated operation, such as a farm worker, grocery bagger, etc.
  • Since she happens to be your daughter and she works for you, there is a provision in tax law to permit you to ignore withholding and remitting Social Security, Medicare and FUTA taxes, either the employer or employee share.
  • Regardless of her relationship with her employer, Federal Income taxes may be due on those wages. The caveat is that if her income subject to Federal Income Tax is below the Standard Deduction ($6,300 in 2016) then no tax will be due.
  • You are welcome to withhold Federal Income Taxes from your daughter's pay, but just know that based on the facts you have shared she will likely receive 100% of it back as a refund.
  • Since she has employment income, particularly as documented by the receipt of a W-2, she is eligible to contribute to a Roth IRA whilst she is effectively in the 0% tax bracket - which I suspect is the whole reason for the gyrations above. :)
I do appreciate the creativity you bring to some of the items in your situation, but I'm not hopeful of their ability to be defended in an audit or Tax Court scenario. If you do push the envelope on those items, I will await the outcome and news items regarding your specific case. :) Hope this all helps.

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Re: HELP!!!--Custodial Roth; hiring child to work on rental property (sole proprietor; individually owned; Schedule E) t

Postby Spirit Rider » Wed Apr 19, 2017 10:54 am

agnielson: The boglehead community welcomes you to our forum. You are a relatively new member with a modest number of posts. We really appreciate members who do their best to provide comprehensive and constructive answers to difficult issues. That is what separates this forum from many others, members helping members.

Poster
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Re: HELP!!!--Custodial Roth; hiring child to work on rental property (sole proprietor; individually owned; Schedule E) t

Postby Poster » Thu Apr 20, 2017 7:53 am

Incredible support once again on this friendliest of forums!
I think I have been empowered enough to get her Roth going (albeit smaller than I'd hoped).

RE: your child as your own household employee:
So, agreed, this wouldn't apply for my situation, but this is fascinating....it makes me wonder under what circumstance it could possibly apply.
For your own child (under 18) to legitimately be your own household employee,...
--their work as a household employee would have to be their principle occupation...so I guess if they were going to school, they would have to be part-time or something. Perhaps they dropped out of high school or completed it early(?)...I imagine most non-Doogie-Howser-type kids would need to be at least 15 or so to potentially be in such a scenario.
--the IRS is assuming they could make over $2,000/year working for you (dad/mom)(?) What types of things could they be doing for you to make that much?

Am I missing something?
Perhaps an example might be a minor (likely 16-20 years old i assume) that finished high school or dropped out (or had some part-time school arrangement) could instead make their principle occupation caring for an ailing parent (or helping their parents care for an ailing grandparent) or something?

Just curious why the IRS even made these exceptions.
(Referring to Pub 926 "Don't count wages you pay to any of the following individuals as social security or Medicare wages, even if these wages are $2,000 or more during the year. 1. Your spouse. 2. Your child who is under the age of 21.")


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