Child Roth rules

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
Kix
Posts: 39
Joined: Wed Mar 25, 2015 1:51 pm

Child Roth rules

Post by Kix »

We have a tween who has earned about $700 selling baked goods this year. We would like to put that much in a Roth IRA for her, but are unsure how to go about it. Does she have to file taxes to prove she had earned income in order for us to open a Roth?

Do we somehow have to report her income on our own return and pay taxes on it?

Any help is appreciated. Thanks.
User avatar
kelway
Posts: 133
Joined: Wed Jan 06, 2016 2:37 pm
Location: Nashville, TN, USA

Re: Child Roth rules

Post by kelway »

DELETED - I was good and wrong by considering this wouldn't be self employment income... not so sure why babysitting isn't self-employment while selling baked goods is, however...
Last edited by kelway on Sun Nov 22, 2020 12:11 am, edited 2 times in total.
checkyourmath
Posts: 130
Joined: Wed Nov 18, 2020 12:46 pm

Re: Child Roth rules

Post by checkyourmath »

That is awesome. I was about to sell my soul as a Lyft driver then have my kids wash the car to contribute to a Roth IRA with their earned income. Thanks for the info.
Flora
Posts: 117
Joined: Sat Mar 26, 2016 6:19 am

Re: Child Roth rules

Post by Flora »

The filing threshold is much lower than $12400 for self-employment income. A 2020 Form 1040 and Schedule C should be filed to report the $700 net self-employment income and pay the self-employment tax liability. A state income tax return may be required as well.
Last edited by Flora on Sat Nov 21, 2020 11:13 pm, edited 1 time in total.
User avatar
FiveK
Posts: 10561
Joined: Sun Mar 16, 2014 2:43 pm

Re: Child Roth rules

Post by FiveK »

Assuming this is self-employment income, she does need to file and pay self-employment tax.

See p. 7 of https://www.irs.gov/pub/irs-pdf/p17.pdf.

This is independent of whether she contributes to a Roth IRA. She'll also have to deduct 1/2 of the SE tax to determine her allowable Roth IRA contribution.
mhalley
Posts: 8514
Joined: Tue Nov 20, 2007 6:02 am

Re: Child Roth rules

Post by mhalley »

She does need to document someway how the money was made. A notebook with something like: Sold 30 cupcakes for a profit of $50 on 1/17/20. Sold 60 brownies for a profit of $100 on 3/15/20. etc. A spreadsheet would also be fine.
http://irakids.com/index.php?section=ho ... ng_records
http://irakids.com/index.php?section=ho ... ying_taxes
Filing Taxes
If kids have over $400 in self-employment income, they should file tax retuirns and pay taxes -- and then with the "after-tax" dollars they can fund their Roth IRAs.

If kids earn under $400 in self-employment income, they do not have to file income tax forms or pay any taxes. However, as an educational exercise and as part of keeping track of earned income, kids may want to complete the tax returns and keep them as part of their documentation of earnings -- but they should not file the tax returens with the Internal Revenue Service (IRS).
Last edited by mhalley on Sat Nov 21, 2020 11:15 pm, edited 1 time in total.
User avatar
dodecahedron
Posts: 5397
Joined: Tue Nov 12, 2013 12:28 pm

Re: Child Roth rules

Post by dodecahedron »

Kix wrote: Sat Nov 21, 2020 10:51 pm We have a tween who has earned about $700 selling baked goods this year. We would like to put that much in a Roth IRA for her, but are unsure how to go about it. Does she have to file taxes to prove she had earned income in order for us to open a Roth?
If she is running her baked goods business in a business-like manner with the intent of earning a profit (as opposed to a hobby), then her *profits* (revenues minus expenses) are earned self-employment income, potentially subject to income tax and self-employment tax if her profits are sufficiently high. If she earned more than $400 in net profit, she is definitely required to file a federal 1040 tax return, with a Schedule C-EZ and Schedule SE attached. This filing requirement holds true whether or not she want to open an IRA (of any type, Roth or traditional.) The standard deduction will wipe out her federal income tax liability, but she will need to pay self-employment tax (about 15% of her net profits). This is a good opportunity to introduce her to Social Security and Medicare as that it what her self-employment tax is going towards.
Do we somehow have to report her income on our own return and pay taxes on it?
Absolutely not. Under NO circumstances does a child's EARNED income from the child's labor go on a parent's return. If the child has a filing return, she needs to file her own return. That said, she is not providing more than half her support, and she lives with you and meets other dependent requirements, the fact that earned a bit of money will not preclude you from continuing to claim her on your return as your dependent.

She needs to check a box on HER return to indicate that she is being claimed as the dependent of another taxpayer. If she does not check that box AND she files before you, it will create problems for you when the IRS process your return. So make very sure the box indicating she qualifies as someone's dependent is checked on her return.
User avatar
celia
Posts: 11547
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Child Roth rules

Post by celia »

Please be aware that she is not eligible for a $700 contribution. She will need to pay (or at least calculate) the employer’s part of OASDI. That amount needs to be subtracted from the $700 showing how much can be contributed.
neverpanic
Posts: 485
Joined: Sun May 10, 2020 12:26 am

Re: Child Roth rules

Post by neverpanic »

Kix wrote: Sat Nov 21, 2020 10:51 pm Do we somehow have to report her income on our own return and pay taxes on it?
No no no. Please do not do that. That only applies to certain situations involving unearned income.
We have a tween who has earned about $700 selling baked goods this year. We would like to put that much in a Roth IRA for her, but are unsure how to go about it. Does she have to file taxes to prove she had earned income in order for us to open a Roth?

Any help is appreciated. Thanks.
When you open a custodial Roth IRA for her, there won't be a requirement for you to prove anything. Just open the account and fund it.

Was that $700 in total sales? Or $700 of net increase? The increase determines what her tax is and also what her IRA contribution limit (specifically from that income) would be.
I am not a financial professional or guru. I'm a schmuck who got lucky 10 times. Such is the life of the trader.
Joe Public
Posts: 12
Joined: Mon Jul 27, 2020 8:36 pm

Re: Child Roth rules

Post by Joe Public »

kelway wrote: Sat Nov 21, 2020 10:56 pm DELETED - I was good and wrong by considering this wouldn't be self employment income... not so sure why babysitting isn't self-employment while selling baked goods is, however...
As far as I know, babysitting income is also earned income and would trigger SE tax. From an enforcement standpoint, though, the IRS doesn’t seem interested in dedicating any resources to that particular issue.
rkhusky
Posts: 10593
Joined: Thu Aug 18, 2011 8:09 pm

Re: Child Roth rules

Post by rkhusky »

Monsterflockster
Posts: 439
Joined: Thu Nov 21, 2019 12:03 am

Re: Child Roth rules

Post by Monsterflockster »

Kix wrote: Sat Nov 21, 2020 10:51 pm We have a tween who has earned about $700 selling baked goods this year. We would like to put that much in a Roth IRA for her, but are unsure how to go about it. Does she have to file taxes to prove she had earned income in order for us to open a Roth?

Do we somehow have to report her income on our own return and pay taxes on it?

Any help is appreciated. Thanks.
You are over complicating things. Just put what she made in a taxable account if you want to teach her about the market.
neverpanic
Posts: 485
Joined: Sun May 10, 2020 12:26 am

Re: Child Roth rules

Post by neverpanic »

Monsterflockster wrote: Sun Nov 22, 2020 10:55 am You are over complicating things. Just put what she made in a taxable account if you want to teach her about the market.
That's a smart way to start, but I also think it's great that the OP wants to begin talking to their pre-teen about taxes. There's nothing wrong with getting foundational education about the basic rules of a Roth IRA and an intro to Social Security.

Tax compliance can be very costly and time-consuming, but you'll rarely go wrong operating with the tax code. The costs of non-compliance when you're a 40-year-old running a business will be much, much higher.
I am not a financial professional or guru. I'm a schmuck who got lucky 10 times. Such is the life of the trader.
Post Reply