Paying 7y/o son as household worker

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Topic Author
Cassera
Posts: 28
Joined: Sat Aug 01, 2020 3:29 pm

Re: Paying 7y/o son as household worker

Post by Cassera » Sat Aug 01, 2020 7:06 pm

UpperNwGuy wrote:
Sat Aug 01, 2020 6:56 pm
Cassera wrote:
Sat Aug 01, 2020 6:54 pm
UpperNwGuy wrote:
Sat Aug 01, 2020 6:48 pm
Cassera wrote:
Sat Aug 01, 2020 6:42 pm
UpperNwGuy wrote:
Sat Aug 01, 2020 6:34 pm
Tax fraud.
What's tax fraud? Self directing a childs Roth or The household worker part?
Trying to create a somewhat phony situation where a 7 year old (who in every state I have lived in would be ineligible for a work permit) inappropriately receives tax benefits not intended for minor children.
You don't have a family business.


So say that.
Dont make a vague invalid statement. Because whether it's for a family business or not, children of 7 years of age are allowed to earn income by working. And no, you dont need a "Working Permit" either.

oldfort
Posts: 1296
Joined: Mon Mar 02, 2020 8:45 pm

Re: Paying 7y/o son as household worker

Post by oldfort » Sat Aug 01, 2020 7:08 pm

Cassera wrote:
Sat Aug 01, 2020 6:54 pm
UpperNwGuy wrote:
Sat Aug 01, 2020 6:48 pm
Cassera wrote:
Sat Aug 01, 2020 6:42 pm
UpperNwGuy wrote:
Sat Aug 01, 2020 6:34 pm
Tax fraud.
What's tax fraud? Self directing a childs Roth or The household worker part?
Trying to create a somewhat phony situation where a 7 year old (who in every state I have lived in would be ineligible for a work permit) inappropriately receives tax benefits not intended for minor children.
You dont need working papers to work for a family business. The IRS allows children as young as 7 to legally work for their parents business on the books. I had a feeling you had no clue what you were saying when you posted that vague statement...
You don't have a family business. If you did, it's difficult to hire children under 12 to do anything without running afoul of child labor laws, at either the federal or state level. See this restaurant for one example.
http://stopchildlabor.org/?p=2311

TropikThunder
Posts: 2400
Joined: Sun Apr 03, 2016 5:41 pm

Re: Paying 7y/o son as household worker

Post by TropikThunder » Sat Aug 01, 2020 7:09 pm

Cassera wrote:
Sat Aug 01, 2020 6:28 pm
I want to LEGALLY have him fund his Roth, and after a few years, self direct it to purchasing real estate in an LLC which is funded by his Roth as well as mine and my wife's. I'd like to run a family business inside of our Roth IRA's eventually.

His Roth will not have any significant amounts obviously, but it will benefit from the larger returns from the real estate.
I'm no expert (there are several RE evangelists who post here, maybe one of them will see this) but it seems to me that buying investment property within an IRA has all of the negatives but only a few of the positives of traditional RE investing. Since the "owner" of the property is the tax-advantaged IRA, you can't claim deductions for property taxes, mortgage interest, or depreciation. You most likely can't get a mortgage (how would you qualify?), so the IRA's would have to be big enough to buy the property for cash. No mortgage means no leverage, which is pretty much the whole point of RE investing. You can't do any of the property maintenance or management yourself, nor can you subsidize the property purchase (those would be prohibited self-dealing transactions). And you can't subsidize repairs, that would have to come out of the IRA too.

Plus, the whole thing could be shooting yourself in the foot because depending on how you set it up, you're at risk of making some or all of the earnings taxable via Unrelated Business Taxable Income (UBTI) rules. Let's say somehow you could get a mortgage to buy the investment properties with 20% down payment. Now, 80% of the earnings (the portion purchased with mortgage funds) are considered UBTI and are thus taxable (tax has to be withheld before the remainder is put back into the IRA). And if you specifically set it up as an LLC, especially one with multiple owners, then all of the RE earnings become active business income = UBTI = taxable.

https://www.fidelity.com/tax-informatio ... opics/ubti
https://www.escapeartist.com/blog/unrel ... %20account.
https://www.investopedia.com/articles/p ... operty.asp

H-Town
Posts: 2831
Joined: Sun Feb 26, 2017 2:08 pm

Re: Paying 7y/o son as household worker

Post by H-Town » Sat Aug 01, 2020 7:17 pm

Cassera wrote:
Sat Aug 01, 2020 3:32 pm
I wanted to know if I can pay my 7yo son as a household worker personally to Supervise his 2 y/o sister, and do work around the house (I rent) outside of regular chores.
I dont own a business. I am an employee and so is my wife.

I want him to have earned income so he can open up a Roth IRA, and am trying to find ways he can legitimately earn income.

Is it possible to do this outside of a business? I hear that the IRS allows children as young as 7 to make earned income working for their parents business for legitimate tasks. But I dont hear anything outside of a business
(Like Supervising his younger sister while I cook and clean, or doing laundry)
Have you considered Self Employment tax, record keeping, and tax filing come with it?

I'm for the idea of teaching kids the value of hard work and money. Kids can learn and develop good financial principles. So parents should consider doing it regardless of using Roth IRA or a taxable account.

If you really want to use Roth IRA for your kids, you need to make sure you cover all the bases.

Broken Man 1999
Posts: 4720
Joined: Wed Apr 08, 2015 11:31 am
Location: West coast of Florida, inland on high ground!

Re: Paying 7y/o son as household worker

Post by Broken Man 1999 » Sat Aug 01, 2020 7:24 pm

Sandtrap wrote:
Sat Aug 01, 2020 6:29 pm
Broken Man 1999 wrote:
Sat Aug 01, 2020 6:24 pm
My father owned citrus groves, and my brother and I both worked on Saturdays and during summers.

He paid us well, and we sure worked hard. I never forgot him telling us both that if we didn't get an education, that work was what we had to look forward to.

A great incentive to get an education.

Broken Man 1999
Wow!
Parallels. . . .

My father owned cow farm. Work was after school and weekends, or through the night if a calf was being born. I don't know how many fence post holes I dug but the fence posts were railroad tie throwaways from the train yard. Huge and soaked with creosote oil.

We were not paid nor had an allowance because there was no extra money for that.

A great incentive to strive and achieve.

j :happy
Yeah, working outside in blistering summer heat was a very good incentive. My favorite activity was cleaning ditches where no air stirred as the ditches were deep, and it seemed always the water was couple of inches deeper than my boots. And, you haven't lived until a snake gets into your boots. :shock:

And, one day I was pruning trees, and as I got under the canopy, I found myself face to face with a rattlesnake. I have no idea how far I threw the pruning shears.

Good times. One thing was I never ever thought I faced hard work in any job I ever had after leaving home. Working in A/C was pretty sweet, in comparison. And all the snakes I faced were the two legged ones, some bosses.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go. " -Mark Twain

retire2022
Posts: 1263
Joined: Tue Oct 02, 2018 6:10 pm
Location: NYC

Re: Paying 7y/o son as household worker

Post by retire2022 » Sat Aug 01, 2020 7:32 pm

TropikThunder wrote:
Sat Aug 01, 2020 7:09 pm
Cassera wrote:
Sat Aug 01, 2020 6:28 pm
I want to LEGALLY have him fund his Roth, and after a few years, self direct it to purchasing real estate in an LLC which is funded by his Roth as well as mine and my wife's. I'd like to run a family business inside of our Roth IRA's eventually.

His Roth will not have any significant amounts obviously, but it will benefit from the larger returns from the real estate.
I'm no expert (there are several RE evangelists who post here, maybe one of them will see this) but it seems to me that buying investment property within an IRA has all of the negatives but only a few of the positives of traditional RE investing. Since the "owner" of the property is the tax-advantaged IRA, you can't claim deductions for property taxes, mortgage interest, or depreciation. You most likely can't get a mortgage (how would you qualify?), so the IRA's would have to be big enough to buy the property for cash. No mortgage means no leverage, which is pretty much the whole point of RE investing. You can't do any of the property maintenance or management yourself, nor can you subsidize the property purchase (those would be prohibited self-dealing transactions). And you can't subsidize repairs, that would have to come out of the IRA too.

Plus, the whole thing could be shooting yourself in the foot because depending on how you set it up, you're at risk of making some or all of the earnings taxable via Unrelated Business Taxable Income (UBTI) rules. Let's say somehow you could get a mortgage to buy the investment properties with 20% down payment. Now, 80% of the earnings (the portion purchased with mortgage funds) are considered UBTI and are thus taxable (tax has to be withheld before the remainder is put back into the IRA). And if you specifically set it up as an LLC, especially one with multiple owners, then all of the RE earnings become active business income = UBTI = taxable.

https://www.fidelity.com/tax-informatio ... opics/ubti
https://www.escapeartist.com/blog/unrel ... %20account.
https://www.investopedia.com/articles/p ... operty.asp
Senator Mitt Romney did made millions with his Self-Directed IRA see Forbes article:

https://www.forbes.com/sites/forbesfina ... roth-iras/

However, when many Americans think of Mitt Romney, they think about his self-directed individual retirement account.

Reports that Mitt Romney has millions of dollars in his IRA caught the attention of media over the years, primarily those who continue to question how one was able to accumulate so much wealth in an IRA.

It is estimated that Mr. Romney has between $20.7 million and $101.6 million in an IRA account, a big chunk of his fortune. However, he used a pre-tax IRA or simplified employee pension (SEP) IRA to make his investments, which will eventually require him to pay ordinary income tax on a percentage of his IRA each year upon reaching the age of 70 ½. With the highest individual income tax rate hovering at approximately 37%, using a pre-tax IRA to make such investments may have actually hurt him.

SR II
Posts: 249
Joined: Wed Mar 19, 2014 7:37 pm

Re: Paying 7y/o son as household worker

Post by SR II » Sat Aug 01, 2020 7:38 pm

OP - I get what you are trying to do. But, I think you are pushing it!

aristotelian
Posts: 7773
Joined: Wed Jan 11, 2017 8:05 pm

Re: Paying 7y/o son as household worker

Post by aristotelian » Sat Aug 01, 2020 7:40 pm

OP, if you want to be on the level, the easy solution here is to use a UTMA account. When child becomes of age he will be in a low tax bracket and can realize long terms capital gains up to $40K annually tax free. Effectively the same benefit as Roth but with no hassle, no lies, no trouble with the IRS.

Topic Author
Cassera
Posts: 28
Joined: Sat Aug 01, 2020 3:29 pm

Re: Paying 7y/o son as household worker

Post by Cassera » Sat Aug 01, 2020 7:41 pm

TropikThunder wrote:
Sat Aug 01, 2020 7:09 pm
Cassera wrote:
Sat Aug 01, 2020 6:28 pm
I want to LEGALLY have him fund his Roth, and after a few years, self direct it to purchasing real estate in an LLC which is funded by his Roth as well as mine and my wife's. I'd like to run a family business inside of our Roth IRA's eventually.

His Roth will not have any significant amounts obviously, but it will benefit from the larger returns from the real estate.
I'm no expert (there are several RE evangelists who post here, maybe one of them will see this) but it seems to me that buying investment property within an IRA has all of the negatives but only a few of the positives of traditional RE investing. Since the "owner" of the property is the tax-advantaged IRA, you can't claim deductions for property taxes, mortgage interest, or depreciation. You most likely can't get a mortgage (how would you qualify?), so the IRA's would have to be big enough to buy the property for cash. No mortgage means no leverage, which is pretty much the whole point of RE investing. You can't do any of the property maintenance or management yourself, nor can you subsidize the property purchase (those would be prohibited self-dealing transactions). And you can't subsidize repairs, that would have to come out of the IRA too.

Plus, the whole thing could be shooting yourself in the foot because depending on how you set it up, you're at risk of making some or all of the earnings taxable via Unrelated Business Taxable Income (UBTI) rules. Let's say somehow you could get a mortgage to buy the investment properties with 20% down payment. Now, 80% of the earnings (the portion purchased with mortgage funds) are considered UBTI and are thus taxable (tax has to be withheld before the remainder is put back into the IRA). And if you specifically set it up as an LLC, especially one with multiple owners, then all of the RE earnings become active business income = UBTI = taxable.

https://www.fidelity.com/tax-informatio ... opics/ubti
https://www.escapeartist.com/blog/unrel ... %20account.
https://www.investopedia.com/articles/p ... operty.asp
You can get a non-recourse loan with an IRA, and all of the profits are not taxed, because they are considered a return on your investment, just like you get a 5 percent return on a Roth IRA from the stock market which isn't taxed, same with self-directed.

Your profits on your real estate are not taxed with a self directed Roth because they go back to the Roth, just like your profits from the stock market would go back to your Roth if you didnt self direct it.

That's the MAJOR benefit of a self directed roth. ALL profits are non taxable, but have to go back into the Roth.

Topic Author
Cassera
Posts: 28
Joined: Sat Aug 01, 2020 3:29 pm

Re: Paying 7y/o son as household worker

Post by Cassera » Sat Aug 01, 2020 7:42 pm

aristotelian wrote:
Sat Aug 01, 2020 7:40 pm
OP, if you want to be on the level, the easy solution here is to use a UTMA account. When child becomes of age he will be in a low tax bracket and can realize long terms capital gains up to $40K annually tax free. Effectively the same benefit as Roth but with no hassle, no lies, no trouble with the IRS.
It looks like that's the route I'm gonna have to go....I really appreciate all the genuine help.

oldfort
Posts: 1296
Joined: Mon Mar 02, 2020 8:45 pm

Re: Paying 7y/o son as household worker

Post by oldfort » Sat Aug 01, 2020 8:29 pm

ElJefeDelQueso wrote:
Sat Aug 01, 2020 4:53 pm
oldfort wrote:
Sat Aug 01, 2020 4:30 pm
Cassera wrote:
Sat Aug 01, 2020 4:23 pm
oldfort wrote:
Sat Aug 01, 2020 4:11 pm
egrets wrote:
Sat Aug 01, 2020 4:03 pm
I haven't read all the replies, but we kids used to earn extra money for chores outside of the regular chores we did. No one was running around calling child protective services, all kids in our neighborhood/family did stuff like this. Extra house cleaning, cutting grass, etc. Kids on farms help take care of animals early on.

If it's legal and won't get you in trouble with busybody government people or busybody neighbors or child labor laws, go for it.
Did your parents issue a W2 for the income from household chores, when you were seven? Did they pay the employer's share of FICA taxes, when you were seven? When you were seven, did you file a 1040? If you want to treat something as real job for purposes of a Roth IRA, you have to treat it as a real job for all the other tax requirements.
You dont Pay FICA taxes when it's your child under 18 and makes less than $12,000 per year and works directly for your business.....and theres nothing wrong with filing a 1040 and issuing a w2....I've done worse at the DMV....


LISTEN EVERYBODY,

I KNOW it can be done through a family business when the child is 7. My question was can it be done outside a business. So all these implications that I'm trying to scam or saying its unheard of, can simply be kept to yourselves.

Either you can or you cant do it. That's all I need to know.
No, you need a real business, not paying the kid for family chores.
Seems like this falls under the description of household employee. I can pay someone outside my household to mow my lawn or I can pay my kid.
If you pay your kid for mowing your lawn, should your kid report the income on a 1040? I would argue the answer is no because no one thinks money you pay your minor child for household chores is income.

User avatar
ResearchMed
Posts: 10397
Joined: Fri Dec 26, 2008 11:25 pm

Re: Paying 7y/o son as household worker

Post by ResearchMed » Sat Aug 01, 2020 9:57 pm

Cassera wrote:
Sat Aug 01, 2020 6:54 pm
UpperNwGuy wrote:
Sat Aug 01, 2020 6:48 pm
Cassera wrote:
Sat Aug 01, 2020 6:42 pm
UpperNwGuy wrote:
Sat Aug 01, 2020 6:34 pm
Tax fraud.
What's tax fraud? Self directing a childs Roth or The household worker part?
Trying to create a somewhat phony situation where a 7 year old (who in every state I have lived in would be ineligible for a work permit) inappropriately receives tax benefits not intended for minor children.
You dont need working papers to work for a family business. The IRS allows children as young as 7 to legally work for their parents business on the books. I had a feeling you had no clue what you were saying when you posted that vague statement...
You've already agreed that the laws do NOT allow what you were asking about.
Continuing to consider doing so would indeed border on considering tax fraud at this point.
Why?

Also, are you aware of the exceedingly complicated regulations about running a business within an IRA?
And how harsh the penalties can be if one "goofs"?

Why are you trying to complicate all of this? First, take care of what is relatively straightforward.

RM
This signature is a placebo. You are in the control group.

manatee2005
Posts: 801
Joined: Wed Dec 18, 2019 9:17 pm

Re: Paying 7y/o son as household worker

Post by manatee2005 » Sat Aug 01, 2020 10:10 pm

Cassera wrote:
Sat Aug 01, 2020 3:32 pm
I wanted to know if I can pay my 7yo son as a household worker personally to Supervise his 2 y/o sister, and do work around the house (I rent) outside of regular chores.
I dont own a business. I am an employee and so is my wife.

I want him to have earned income so he can open up a Roth IRA, and am trying to find ways he can legitimately earn income.

Is it possible to do this outside of a business? I hear that the IRS allows children as young as 7 to make earned income working for their parents business for legitimate tasks. But I dont hear anything outside of a business
(Like Supervising his younger sister while I cook and clean, or doing laundry)
You are basically asking to put your kids allowance into Roth IRA. Unless you want to sit in front of an IRS employee during an audit, it's a no go.

Topic Author
Cassera
Posts: 28
Joined: Sat Aug 01, 2020 3:29 pm

Re: Paying 7y/o son as household worker

Post by Cassera » Sat Aug 01, 2020 10:26 pm

manatee2005 wrote:
Sat Aug 01, 2020 10:10 pm
Cassera wrote:
Sat Aug 01, 2020 3:32 pm
I wanted to know if I can pay my 7yo son as a household worker personally to Supervise his 2 y/o sister, and do work around the house (I rent) outside of regular chores.
I dont own a business. I am an employee and so is my wife.

I want him to have earned income so he can open up a Roth IRA, and am trying to find ways he can legitimately earn income.

Is it possible to do this outside of a business? I hear that the IRS allows children as young as 7 to make earned income working for their parents business for legitimate tasks. But I dont hear anything outside of a business
(Like Supervising his younger sister while I cook and clean, or doing laundry)
You are basically asking to put your kids allowance into Roth IRA. Unless you want to sit in front of an IRS employee during an audit, it's a no go.
I
Yeah, I've gotten that vibe so far.🤣🤣...couldn't hurt to ask.

Topic Author
Cassera
Posts: 28
Joined: Sat Aug 01, 2020 3:29 pm

Re: Paying 7y/o son as household worker

Post by Cassera » Sat Aug 01, 2020 10:29 pm

ResearchMed wrote:
Sat Aug 01, 2020 9:57 pm
Cassera wrote:
Sat Aug 01, 2020 6:54 pm
UpperNwGuy wrote:
Sat Aug 01, 2020 6:48 pm
Cassera wrote:
Sat Aug 01, 2020 6:42 pm
UpperNwGuy wrote:
Sat Aug 01, 2020 6:34 pm
Tax fraud.
What's tax fraud? Self directing a childs Roth or The household worker part?
Trying to create a somewhat phony situation where a 7 year old (who in every state I have lived in would be ineligible for a work permit) inappropriately receives tax benefits not intended for minor children.
You dont need working papers to work for a family business. The IRS allows children as young as 7 to legally work for their parents business on the books. I had a feeling you had no clue what you were saying when you posted that vague statement...
You've already agreed that the laws do NOT allow what you were asking about.
Continuing to consider doing so would indeed border on considering tax fraud at this point.
Why?

Also, are you aware of the exceedingly complicated regulations about running a business within an IRA?
And how harsh the penalties can be if one "goofs"?

Why are you trying to complicate all of this? First, take care of what is relatively straightforward.

RM
I am well aware of that aspect of things. Well aware I will need a team of a Broker, Lawyer and accountant. And it is a route I certainly will take if that means a significantly bigger ROI. I am willing to take the steps to make the money. That's no issue.

manatee2005
Posts: 801
Joined: Wed Dec 18, 2019 9:17 pm

Re: Paying 7y/o son as household worker

Post by manatee2005 » Sat Aug 01, 2020 10:54 pm

Cassera wrote:
Sat Aug 01, 2020 10:26 pm
manatee2005 wrote:
Sat Aug 01, 2020 10:10 pm
Cassera wrote:
Sat Aug 01, 2020 3:32 pm
I wanted to know if I can pay my 7yo son as a household worker personally to Supervise his 2 y/o sister, and do work around the house (I rent) outside of regular chores.
I dont own a business. I am an employee and so is my wife.

I want him to have earned income so he can open up a Roth IRA, and am trying to find ways he can legitimately earn income.

Is it possible to do this outside of a business? I hear that the IRS allows children as young as 7 to make earned income working for their parents business for legitimate tasks. But I dont hear anything outside of a business
(Like Supervising his younger sister while I cook and clean, or doing laundry)
You are basically asking to put your kids allowance into Roth IRA. Unless you want to sit in front of an IRS employee during an audit, it's a no go.
I
Yeah, I've gotten that vibe so far.🤣🤣...couldn't hurt to ask.
It's a good question. There was one guy here who created some online business and put a picture of his baby on the website. He paid his baby $200 for the picture and put it in the baby's Roth IRA. Don't know if he got audited or not though.

ClaycordJCA
Posts: 353
Joined: Sun Aug 09, 2015 11:19 pm
Location: SF Bay Area

Re: Paying 7y/o son as household worker

Post by ClaycordJCA » Sat Aug 01, 2020 11:04 pm

You are asking for legal advice on an anonymous forum. The information you are getting is worth absolutely nothing. If you want advice you can rely upon, pay the $ to consult with a tax lawyer and get a legal opinion from an expert. You can sue for malpractice if they muck it up. Or proceed without consulting a lawyer and take the risk the IRS and/or a state taxing authority considers it fraud (which will cost you a heck of a lot more than paying for proper legal advice). You should also consult with an employment lawyer to make sure treating your child as an employee doesn’t raise other issues, such as workers’ compensation (I assume your nanny is covered), minimum wage, etc. in your state.

oldfort
Posts: 1296
Joined: Mon Mar 02, 2020 8:45 pm

Re: Paying 7y/o son as household worker

Post by oldfort » Sat Aug 01, 2020 11:06 pm

manatee2005 wrote:
Sat Aug 01, 2020 10:54 pm
Cassera wrote:
Sat Aug 01, 2020 10:26 pm
manatee2005 wrote:
Sat Aug 01, 2020 10:10 pm
Cassera wrote:
Sat Aug 01, 2020 3:32 pm
I wanted to know if I can pay my 7yo son as a household worker personally to Supervise his 2 y/o sister, and do work around the house (I rent) outside of regular chores.
I dont own a business. I am an employee and so is my wife.

I want him to have earned income so he can open up a Roth IRA, and am trying to find ways he can legitimately earn income.

Is it possible to do this outside of a business? I hear that the IRS allows children as young as 7 to make earned income working for their parents business for legitimate tasks. But I dont hear anything outside of a business
(Like Supervising his younger sister while I cook and clean, or doing laundry)
You are basically asking to put your kids allowance into Roth IRA. Unless you want to sit in front of an IRS employee during an audit, it's a no go.
I
Yeah, I've gotten that vibe so far.🤣🤣...couldn't hurt to ask.
It's a good question. There was one guy here who created some online business and put a picture of his baby on the website. He paid his baby $200 for the picture and put it in the baby's Roth IRA. Don't know if he got audited or not though.
Brilliant. The OP should create a Roth IRA for the 2y/o at the same time. Treat all the kids equally.

aristotelian
Posts: 7773
Joined: Wed Jan 11, 2017 8:05 pm

Re: Paying 7y/o son as household worker

Post by aristotelian » Sat Aug 01, 2020 11:14 pm

oldfort wrote:
Sat Aug 01, 2020 11:06 pm
manatee2005 wrote:
Sat Aug 01, 2020 10:54 pm
It's a good question. There was one guy here who created some online business and put a picture of his baby on the website. He paid his baby $200 for the picture and put it in the baby's Roth IRA. Don't know if he got audited or not though.
Brilliant. The OP should create a Roth IRA for the 2y/o at the same time. Treat all the kids equally.
Why not just take 30 pictures and max it? One for every day of the month.

fyre4ce
Posts: 764
Joined: Sun Aug 06, 2017 11:29 am

Re: Paying 7y/o son as household worker

Post by fyre4ce » Sat Aug 01, 2020 11:37 pm

The consensus opinion (and the one I tend to agree with) is that this would be abusive of the tax code. People can, and do, commit worse tax fraud, but that's no reason to break the rules yourself. My standard for tax aggressiveness is what I'd be comfortable explaining to an IRS auditor. I would not be comfortable telling an auditor that my 7 y/o was "babysitting" my 2 y/o with me present to "supervise" 100% of the time. If the 7 year old were doing legitimate work for a business, like working on the family farm, then you might have a case. General housework that every family needs, even at tasks that are commonly outsourced (cooking, cleaning, mowing the lawn, etc.) doesn't pass muster in my opinion, and that of many others here.

If you don't like this answer, consult a tax attorney. If they say yes, then great, and you have someone to sue for malpractice if you fail an audit.

If you do move forward with this plan, also pay careful attention to how much you're paying. The temptation would be to pay your kid at an hourly rate similar to a Manhattan attorney, but that's also abusive on its own.

Topic Author
Cassera
Posts: 28
Joined: Sat Aug 01, 2020 3:29 pm

Re: Paying 7y/o son as household worker

Post by Cassera » Sun Aug 02, 2020 12:48 am

fyre4ce wrote:
Sat Aug 01, 2020 11:37 pm
The consensus opinion (and the one I tend to agree with) is that this would be abusive of the tax code. People can, and do, commit worse tax fraud, but that's no reason to break the rules yourself. My standard for tax aggressiveness is what I'd be comfortable explaining to an IRS auditor. I would not be comfortable telling an auditor that my 7 y/o was "babysitting" my 2 y/o with me present to "supervise" 100% of the time. If the 7 year old were doing legitimate work for a business, like working on the family farm, then you might have a case. General housework that every family needs, even at tasks that are commonly outsourced (cooking, cleaning, mowing the lawn, etc.) doesn't pass muster in my opinion, and that of many others here.

If you don't like this answer, consult a tax attorney. If they say yes, then great, and you have someone to sue for malpractice if you fail an audit.

If you do move forward with this plan, also pay careful attention to how much you're paying. The temptation would be to pay your kid at an hourly rate similar to a Manhattan attorney, but that's also abusive on its own.
I'll have a more detailed convo with my accountant and financial advisor on Monday, but if it's ever a borderline violation, I'm not up for it.

Figured I'd get a general consensus, and I think I got it...

Minty
Posts: 336
Joined: Sun Mar 24, 2013 3:19 pm
Location: NorCal

Re: Paying 7y/o son as household worker

Post by Minty » Sun Aug 02, 2020 2:31 am

Cassera wrote:
Sat Aug 01, 2020 6:08 pm
7eight9 wrote:
Sat Aug 01, 2020 5:55 pm
When hiring your own children, you can pay them to do work for your business, but you cannot pay them to do personal household chores.

What is the difference?

A U.S. Tax Court case (T.C. Summary Opinion 2006-127) has shed light on this question.

Michael D. and Christine R. Alexander v. Commissioner, 2006 T.C. Summary Opinion 127
https://www.courtlistener.com/opinion/4 ... missioner/
This is very helpful and clearly states exactly what I wanted to do was in fact, not allowed.....thanks!
As I read this case, it held that the expenses are not deductible from the parents' income, because the hours worked were not really in service of the family businesses. It does not hold that payments for work around the house cannot be income to the children, which is a different question not at issue in the case. A quick Google search of the IRS website seems to say that babysitting for relatives generates taxable income to the recipient. This is true even though babysitting costs are normally not deductible to the payer.
Core Four w/ nominal bonds & TIPS. Refi Rampage: Purchase: 4.125% 30 -> R1 3% 20 -> R2 2.375% 15 -> R3 shopping

egrets
Posts: 100
Joined: Sun Jul 05, 2020 2:56 pm

Re: Paying 7y/o son as household worker

Post by egrets » Sun Aug 02, 2020 6:43 am

MishkaWorries wrote:
Sat Aug 01, 2020 4:38 pm
Cassera wrote:
Sat Aug 01, 2020 4:23 pm

LISTEN EVERYBODY,

I KNOW it can be done through a family business when the child is 7. My question was can it be done outside a business. So all these implications that I'm trying to scam or saying its unheard of, can simply be kept to yourselves.

Either you can or you cant do it. That's all I need to know.

Wow. Are you always this rude to random strangers you have asked them to assist you?
Probably yes when the random strangers are saying he's a crook instead of answering his question.

User avatar
unclescrooge
Posts: 5067
Joined: Thu Jun 07, 2012 7:00 pm

Re: Paying 7y/o son as household worker

Post by unclescrooge » Sun Aug 02, 2020 9:34 am

Cassera wrote:
Sat Aug 01, 2020 7:41 pm
TropikThunder wrote:
Sat Aug 01, 2020 7:09 pm
Cassera wrote:
Sat Aug 01, 2020 6:28 pm
I want to LEGALLY have him fund his Roth, and after a few years, self direct it to purchasing real estate in an LLC which is funded by his Roth as well as mine and my wife's. I'd like to run a family business inside of our Roth IRA's eventually.

His Roth will not have any significant amounts obviously, but it will benefit from the larger returns from the real estate.
I'm no expert (there are several RE evangelists who post here, maybe one of them will see this) but it seems to me that buying investment property within an IRA has all of the negatives but only a few of the positives of traditional RE investing. Since the "owner" of the property is the tax-advantaged IRA, you can't claim deductions for property taxes, mortgage interest, or depreciation. You most likely can't get a mortgage (how would you qualify?), so the IRA's would have to be big enough to buy the property for cash. No mortgage means no leverage, which is pretty much the whole point of RE investing. You can't do any of the property maintenance or management yourself, nor can you subsidize the property purchase (those would be prohibited self-dealing transactions). And you can't subsidize repairs, that would have to come out of the IRA too.

Plus, the whole thing could be shooting yourself in the foot because depending on how you set it up, you're at risk of making some or all of the earnings taxable via Unrelated Business Taxable Income (UBTI) rules. Let's say somehow you could get a mortgage to buy the investment properties with 20% down payment. Now, 80% of the earnings (the portion purchased with mortgage funds) are considered UBTI and are thus taxable (tax has to be withheld before the remainder is put back into the IRA). And if you specifically set it up as an LLC, especially one with multiple owners, then all of the RE earnings become active business income = UBTI = taxable.

https://www.fidelity.com/tax-informatio ... opics/ubti
https://www.escapeartist.com/blog/unrel ... %20account.
https://www.investopedia.com/articles/p ... operty.asp
You can get a non-recourse loan with an IRA, and all of the profits are not taxed, because they are considered a return on your investment, just like you get a 5 percent return on a Roth IRA from the stock market which isn't taxed, same with self-directed.

Your profits on your real estate are not taxed with a self directed Roth because they go back to the Roth, just like your profits from the stock market would go back to your Roth if you didnt self direct it.

That's the MAJOR benefit of a self directed roth. ALL profits are non taxable, but have to go back into the Roth.
Do you actually own any profitable real estate and are familiar with the taxation on income, gains and tax deferrals via 1031 exchanges?

Also, are you aware of the phantom depreciation losses that can reduce your income under certain circumstances?

If you were, I doubt you would be entertaining the idea of putting real estate investments in an IRA.

Unless you're thinking about making investments in crowd funding deals, which are often a bad investment, but maybe a better use for the IRA than taxable.

oldfort
Posts: 1296
Joined: Mon Mar 02, 2020 8:45 pm

Re: Paying 7y/o son as household worker

Post by oldfort » Sun Aug 02, 2020 9:35 am

egrets wrote:
Sun Aug 02, 2020 6:43 am
MishkaWorries wrote:
Sat Aug 01, 2020 4:38 pm
Cassera wrote:
Sat Aug 01, 2020 4:23 pm

LISTEN EVERYBODY,

I KNOW it can be done through a family business when the child is 7. My question was can it be done outside a business. So all these implications that I'm trying to scam or saying its unheard of, can simply be kept to yourselves.

Either you can or you cant do it. That's all I need to know.

Wow. Are you always this rude to random strangers you have asked them to assist you?
Probably yes when the random strangers are saying he's a crook instead of answering his question.
The whole question was ridiculous, basically whether a 7-year-old can be paid for playing for his baby sister and count this as earned income for a Roth IRA. This isn't age appropriate work for which anyone would hire a third party. If the son wasn't available, would the OP hire another child of the same age to do the same type of work?

michaeljc70
Posts: 6804
Joined: Thu Oct 15, 2015 3:53 pm

Re: Paying 7y/o son as household worker

Post by michaeljc70 » Sun Aug 02, 2020 9:41 am

aristotelian wrote:
Sat Aug 01, 2020 7:40 pm
OP, if you want to be on the level, the easy solution here is to use a UTMA account. When child becomes of age he will be in a low tax bracket and can realize long terms capital gains up to $40K annually tax free. Effectively the same benefit as Roth but with no hassle, no lies, no trouble with the IRS.
Exactly!

Topic Author
Cassera
Posts: 28
Joined: Sat Aug 01, 2020 3:29 pm

Re: Paying 7y/o son as household worker

Post by Cassera » Sun Aug 02, 2020 9:58 am

unclescrooge wrote:
Sun Aug 02, 2020 9:34 am
Cassera wrote:
Sat Aug 01, 2020 7:41 pm
TropikThunder wrote:
Sat Aug 01, 2020 7:09 pm
Cassera wrote:
Sat Aug 01, 2020 6:28 pm
I want to LEGALLY have him fund his Roth, and after a few years, self direct it to purchasing real estate in an LLC which is funded by his Roth as well as mine and my wife's. I'd like to run a family business inside of our Roth IRA's eventually.

His Roth will not have any significant amounts obviously, but it will benefit from the larger returns from the real estate.
I'm no expert (there are several RE evangelists who post here, maybe one of them will see this) but it seems to me that buying investment property within an IRA has all of the negatives but only a few of the positives of traditional RE investing. Since the "owner" of the property is the tax-advantaged IRA, you can't claim deductions for property taxes, mortgage interest, or depreciation. You most likely can't get a mortgage (how would you qualify?), so the IRA's would have to be big enough to buy the property for cash. No mortgage means no leverage, which is pretty much the whole point of RE investing. You can't do any of the property maintenance or management yourself, nor can you subsidize the property purchase (those would be prohibited self-dealing transactions). And you can't subsidize repairs, that would have to come out of the IRA too.

Plus, the whole thing could be shooting yourself in the foot because depending on how you set it up, you're at risk of making some or all of the earnings taxable via Unrelated Business Taxable Income (UBTI) rules. Let's say somehow you could get a mortgage to buy the investment properties with 20% down payment. Now, 80% of the earnings (the portion purchased with mortgage funds) are considered UBTI and are thus taxable (tax has to be withheld before the remainder is put back into the IRA). And if you specifically set it up as an LLC, especially one with multiple owners, then all of the RE earnings become active business income = UBTI = taxable.

https://www.fidelity.com/tax-informatio ... opics/ubti
https://www.escapeartist.com/blog/unrel ... %20account.
https://www.investopedia.com/articles/p ... operty.asp
You can get a non-recourse loan with an IRA, and all of the profits are not taxed, because they are considered a return on your investment, just like you get a 5 percent return on a Roth IRA from the stock market which isn't taxed, same with self-directed.

Your profits on your real estate are not taxed with a self directed Roth because they go back to the Roth, just like your profits from the stock market would go back to your Roth if you didnt self direct it.

That's the MAJOR benefit of a self directed roth. ALL profits are non taxable, but have to go back into the Roth.
Do you actually own any profitable real estate and are familiar with the taxation on income, gains and tax deferrals via 1031 exchanges?

Also, are you aware of the phantom depreciation losses that can reduce your income under certain circumstances?

If you were, I doubt you would be entertaining the idea of putting real estate investments in an IRA.

Unless you're thinking about making investments in crowd funding deals, which are often a bad investment, but maybe a better use for the IRA than taxable.
Your not understanding that there is NO TAX on real estate profits when its inside of a Roth IRA. The mo eye comes out of the IRA to the Rental Property. The profit (rent or refinance) goes straight back into the Roth IRA tax free because it is treated as a profit inside of a Roth IRA which everybody knows are tax free.

The only taxes to be paid are the taxes on property its self, which comes out of the Roth.

So what are you referring to?

Topic Author
Cassera
Posts: 28
Joined: Sat Aug 01, 2020 3:29 pm

Re: Paying 7y/o son as household worker

Post by Cassera » Sun Aug 02, 2020 10:29 am

egrets wrote:
Sun Aug 02, 2020 6:43 am
MishkaWorries wrote:
Sat Aug 01, 2020 4:38 pm
Cassera wrote:
Sat Aug 01, 2020 4:23 pm

LISTEN EVERYBODY,

I KNOW it can be done through a family business when the child is 7. My question was can it be done outside a business. So all these implications that I'm trying to scam or saying its unheard of, can simply be kept to yourselves.

Either you can or you cant do it. That's all I need to know.

Wow. Are you always this rude to random strangers you have asked them to assist you?
Probably yes when the random strangers are saying he's a crook instead of answering his question.
I'm glad I'm not the only one who recognizes that! Thank you.
Yes, it may be a silly question, but I asked. Because I wanted to know if it can be done. There are more absurd legalities that are in place than what I suggested.

Especially if yes, 7 year olds are allowed to earn I come through a family business. And you are also allowed to personally pay a Nanny as a household worker (yes for household chores) out of pocket. Why is it so absurd to think you can combine the two?

But now I know.

oldfort
Posts: 1296
Joined: Mon Mar 02, 2020 8:45 pm

Re: Paying 7y/o son as household worker

Post by oldfort » Sun Aug 02, 2020 10:51 am

Cassera wrote:
Sun Aug 02, 2020 10:29 am
egrets wrote:
Sun Aug 02, 2020 6:43 am
MishkaWorries wrote:
Sat Aug 01, 2020 4:38 pm
Cassera wrote:
Sat Aug 01, 2020 4:23 pm

LISTEN EVERYBODY,

I KNOW it can be done through a family business when the child is 7. My question was can it be done outside a business. So all these implications that I'm trying to scam or saying its unheard of, can simply be kept to yourselves.

Either you can or you cant do it. That's all I need to know.

Wow. Are you always this rude to random strangers you have asked them to assist you?
Probably yes when the random strangers are saying he's a crook instead of answering his question.
I'm glad I'm not the only one who recognizes that! Thank you.
Yes, it may be a silly question, but I asked. Because I wanted to know if it can be done. There are more absurd legalities that are in place than what I suggested.

Especially if yes, 7 year olds are allowed to earn I come through a family business. And you are also allowed to personally pay a Nanny as a household worker (yes for household chores) out of pocket. Why is it so absurd to think you can combine the two?

But now I know.
But a 7 year old can't be a nanny. If you don't believe me, leave your 7y/o and 2y/o home alone, have a neighbor report it to CPS, and see if your kids are there when you get back. Have fun explaining to CPS social workers how your 7y/o nanny supervised the 2y/o, when you were gone and how that doesn't qualify as child endangerment.

Topic Author
Cassera
Posts: 28
Joined: Sat Aug 01, 2020 3:29 pm

Re: Paying 7y/o son as household worker

Post by Cassera » Sun Aug 02, 2020 12:16 pm

oldfort wrote:
Sun Aug 02, 2020 10:51 am
Cassera wrote:
Sun Aug 02, 2020 10:29 am
egrets wrote:
Sun Aug 02, 2020 6:43 am
MishkaWorries wrote:
Sat Aug 01, 2020 4:38 pm
Cassera wrote:
Sat Aug 01, 2020 4:23 pm

LISTEN EVERYBODY,

I KNOW it can be done through a family business when the child is 7. My question was can it be done outside a business. So all these implications that I'm trying to scam or saying its unheard of, can simply be kept to yourselves.

Either you can or you cant do it. That's all I need to know.

Wow. Are you always this rude to random strangers you have asked them to assist you?
Probably yes when the random strangers are saying he's a crook instead of answering his question.
I'm glad I'm not the only one who recognizes that! Thank you.
Yes, it may be a silly question, but I asked. Because I wanted to know if it can be done. There are more absurd legalities that are in place than what I suggested.

Especially if yes, 7 year olds are allowed to earn I come through a family business. And you are also allowed to personally pay a Nanny as a household worker (yes for household chores) out of pocket. Why is it so absurd to think you can combine the two?

But now I know.
But a 7 year old can't be a nanny. If you don't believe me, leave your 7y/o and 2y/o home alone, have a neighbor report it to CPS, and see if your kids are there when you get back. Have fun explaining to CPS social workers how your 7y/o nanny supervised the 2y/o, when you were gone and how that doesn't qualify as child endangerment.
Dude, spare me the nonsense. Nobody said I'm leaving my kid home alone. Nobody said he will be a nanny. I've initiated many CPS investigations in my career. I am well aware of the legal system. You dont know what your talking about.
Somebody mowing your lawn is a household worker. Somebody gardening for you is a household worker. Nannies work when your home with the children as well.

Your making things up to make a point that makes you feel better. I never said anywhere I will leave my kids home alone.

User avatar
unclescrooge
Posts: 5067
Joined: Thu Jun 07, 2012 7:00 pm

Re: Paying 7y/o son as household worker

Post by unclescrooge » Sun Aug 02, 2020 12:20 pm

Cassera wrote:
Sun Aug 02, 2020 9:58 am
unclescrooge wrote:
Sun Aug 02, 2020 9:34 am

Do you actually own any profitable real estate and are familiar with the taxation on income, gains and tax deferrals via 1031 exchanges?

Also, are you aware of the phantom depreciation losses that can reduce your income under certain circumstances?

If you were, I doubt you would be entertaining the idea of putting real estate investments in an IRA.

Unless you're thinking about making investments in crowd funding deals, which are often a bad investment, but maybe a better use for the IRA than taxable.
Your not understanding that there is NO TAX on real estate profits when its inside of a Roth IRA. The mo eye comes out of the IRA to the Rental Property. The profit (rent or refinance) goes straight back into the Roth IRA tax free because it is treated as a profit inside of a Roth IRA which everybody knows are tax free.

The only taxes to be paid are the taxes on property its self, which comes out of the Roth.

So what are you referring to?
How exactly are you planning to pull this off?

Few people have enough inside a Roth to invest in real estate. If you are short on maintenance or repairs, you cannot personally make up the difference.

As mentioned earlier, you are very likely to run affoul of UBIT. Which will defeat your intent.

Real estate is already tax advantaged. It is possible it is tax free income ANYWAY. Putting it inside a another tax advantaged account is too much effort for no return.

If done properly, there will be no taxes on real estate investments anyway. You're just creating a tax reporting nightmare for yourself.

There are also other issues.

Inside an IRA, you will need frequent appraisals of your property. This is not a low cost expense.

When taking RMDs, you will also run into issues where you may not have sufficient liquidity to cover distributions.

So if you get tax free income investing normally, why on earth would you put it in a Roth?

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cowdogman
Posts: 535
Joined: Sat Dec 16, 2017 7:44 pm
Location: Washington State

Re: Paying 7y/o son as household worker

Post by cowdogman » Sun Aug 02, 2020 12:37 pm

I'm skipping over all the interim messages and just responding to the original post:

Wouldn't it be easier, at least for a few years, to contribute to an UTMA or 529 and achieve tax-free growth that way. (I realize an UTMA is not tax-free, but unless you are talking large amounts of compensation to the child with resulting large interest/dividend income, it is effectively tax free. And if you are talking large amounts of compensation, you should be talking with an estate attorney about how to achieve your goals.)

If your son wanted he could use the UTMA money to fund a Roth when he is 18.

[Edit: Sorry, just noticed someone suggested the UTMA idea above.]

Flyer24
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Re: Paying 7y/o son as household worker

Post by Flyer24 » Sun Aug 02, 2020 12:47 pm

The original question has been answered enough. Thread has run its course.

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