Teen Daughter with 1099 summer job - IRA contribution limit?

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spaddlewit
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Teen Daughter with 1099 summer job - IRA contribution limit?

Post by spaddlewit »

My 14yo daughter has her first job this summer... but it's not a typical wage job - she's being paid as a contractor and will receive a 1099 from her employer at the end of year. We are going to open a Roth IRA account to contribute to, but it's unclear to me what the contribution limit would be.. she definitely will not be earning the $7000 contribution limit, and she has to pay medicare/SS herself when she goes to file taxes this year.

Is the sum of her checks being received by the employer considered her IRA contribution maximum? Or is it minus the 15.3% employment taxes?
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by mhadden1 »

spaddlewit wrote: Mon Jul 08, 2024 9:13 pm My 14yo daughter has her first job this summer... but it's not a typical wage job - she's being paid as a contractor and will receive a 1099 from her employer at the end of year. We are going to open a Roth IRA account to contribute to, but it's unclear to me what the contribution limit would be.. she definitely will not be earning the $7000 contribution limit, and she has to pay medicare/SS herself when she goes to file taxes this year.

Is the sum of her checks being received by the employer considered her IRA contribution maximum? Or is it minus the 15.3% employment taxes?
Whatever she earns, up to $7000, is her Roth contribution limit. Just like if she had a W-2 job, where the Roth limit would be her wage amount, and would not be reduced by FICA or state taxes or whatnot.
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nalor511
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by nalor511 »

Gross income , don't remove taxes, is the number
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by Ivanhoe »

Her contribution limit would be the sum of her taxable earnings for the year, it is not reduced for the FICA tax she would need to pay. So if she earns say $2,000 working over the summer, and that is her only income for the entire year, she would be limited to a $2,000 maximum contribution for the year.
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by arcticpineapplecorp. »

assuming here she doesn't have any expenses to reduce the taxable income, i.e., the gross on the 1099-NEC is the self employment net income.

if you look at form 1040 you'd enter the self employment net income on line 8 (additional income from Schedule 1, line 10)

that's your total income and what the IRA contribution can be based on.

So whatever income she has on line 8 (net self employment after any expenses, but not half of self employment tax) you can contribute to Roth, up to the limit, whichever is less.

After that come the deductions:
half of self employment tax on line 10 of the 1040.
standard deduction on line 12 of the 1040.

you can see for yourself on the forms you'll need:
1040
Schedule C
Schedule SE
Schedule 1
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by sailaway »

I am going to disagree with the above (OK, agree with immediately above). Income is reduced by the employer part of FICA, if she owes payroll taxes. The IRS refers to this as the deductible portion of taxes.
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by bombcar »

apparently based on some previous threads there's some weirdness with household employees - if she qualifies, she may be able to avoid FICA tax (search recent threads)
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by FiveK »

sailaway wrote: Mon Jul 08, 2024 9:31 pm Income is reduced by the employer part of FICA, if she owes payroll taxes.
+1

spaddlewit, see Self-employment income for the straight-from-the-IRS confirmation. Does that make it clear?
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by mhadden1 »

FiveK wrote: Mon Jul 08, 2024 10:22 pm
sailaway wrote: Mon Jul 08, 2024 9:31 pm Income is reduced by the employer part of FICA, if she owes payroll taxes.
+1

spaddlewit, see Self-employment income for the straight-from-the-IRS confirmation. Does that make it clear?
Looks like a guy on the internet made a mistake on his taxes. :oops:
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spaddlewit
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by spaddlewit »

Thanks everybody...although the last few posts have started to make me a little confused - maybe a hypothetical is a better example:

Let's say she is cut checks totaling $2,000 throughout the summer. They are not wages - they are contractor payments. She is not a household employee. She is not an LLC or an S Corp, so will be considered a Sole Proprietor. At the end of the year, she will need to send the IRS the full 15.3% employment taxes, since her employer is not sending anything to the IRS other than a W-9.

Is her maximum allowable IRA contribution $1,847 (2,000 - 7.65%), or is it the full $2,000?
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by peteyboy »

spaddlewit wrote: Tue Jul 09, 2024 6:49 am Thanks everybody...although the last few posts have started to make me a little confused - maybe a hypothetical is a better example:

Let's say she is cut checks totaling $2,000 throughout the summer. They are not wages - they are contractor payments. She is not a household employee. She is not an LLC or an S Corp, so will be considered a Sole Proprietor. At the end of the year, she will need to send the IRS the full 15.3% employment taxes, since her employer is not sending anything to the IRS other than a W-9.

Is her maximum allowable IRA contribution $1,847 (2,000 - 7.65%), or is it the full $2,000?
The lesser. Has to account for the employer share of FICA tax. Look at Schedule SE (Line 13) then Schedule 1.
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by tibbitts »

spaddlewit wrote: Tue Jul 09, 2024 6:49 am Thanks everybody...although the last few posts have started to make me a little confused - maybe a hypothetical is a better example:

Let's say she is cut checks totaling $2,000 throughout the summer. They are not wages - they are contractor payments. She is not a household employee. She is not an LLC or an S Corp, so will be considered a Sole Proprietor. At the end of the year, she will need to send the IRS the full 15.3% employment taxes, since her employer is not sending anything to the IRS other than a W-9.

Is her maximum allowable IRA contribution $1,847 (2,000 - 7.65%), or is it the full $2,000?
It's the smaller amount, or at least that's my non-expert understanding. But shouldn't she be figuring that out (even if by asking here), and learning about the other tax implications of self employment? Obviously you should "check her work", but she needs to learn about taxes. Now admittedly the possibility is that she'll learn to detest self-employment and aspire to never again be anything other than a W2 worker-bee, but it's like with investing: everybody is eager to get their kids to invest, without considering that they might look back in a decade and discover they have less than they started with and learn a different lesson than intended. Or she might love dealing with taxes, and that could start her off on a career path that she might not have considered otherwise.
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by MP123 »

spaddlewit wrote: Tue Jul 09, 2024 6:49 am Is her maximum allowable IRA contribution $1,847 (2,000 - 7.65%), or is it the full $2,000?
Neither, because the calculation for self-employment tax is slightly more complex.

When calculating SEtax net business income must first be reduced by .9235. Otherwise you end up paying 7.65% of the deductible half.

So it would be:

$2000 *.9235 = $1847

$1847 * 15.3% = $282.59 (Assuming this is her only income subject to FICA)

$282.59/2 = $141.29 (the deductible half)

Then, $2000 - $141.29 = $1858.71

So, $1858.71 would be her "compensation" from self-employment.

See the method on Schedule SE:
https://www.irs.gov/pub/irs-pdf/f1040sse.pdf
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by MarkNYC »

spaddlewit wrote: Tue Jul 09, 2024 6:49 am Let's say she is cut checks totaling $2,000 throughout the summer. They are not wages - they are contractor payments. She is not a household employee. She is not an LLC or an S Corp, so will be considered a Sole Proprietor. At the end of the year, she will need to send the IRS the full 15.3% employment taxes, since her employer is not sending anything to the IRS other than a W-9.
Not necessarily. If an activity is nonrecurring and not carried with continuity and regularity, the IRS will consider it a sporadic activity rather than a trade or business or profession which would be subject to self-employment tax. I would be curious what type of work by a 14-year old on their first summer job would rise to the level of conduct of a trade or business, thus subject to SE tax?

It's not unusual for an employer to issue a 1099 to a temporary worker when they should issue a W-2, simply because it's more convenient for the employer. But the issuance of a 1099 does not, by itself, mean that the worker is engaged in a trade or business. The facts and circumstances of each situation are what matter.

Many taxpayers who receive a 1099-NEC who are not properly engaged in a trade or business just prefer to report self-employment income and pay the SE tax rather than risk an IRS inquiry, and the IRS will not object to this even though it may not be correct.

And the law does not require that a non-employee worker pay SE tax in order to qualify for an IRA contribution. All that's needed is taxable compensation for services performed.
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by cchrissyy »

everybody so far is focused on the number before or after taxes and honestly i don't recall which is right
but i do know that if she has any expenses, neither answer is correct, because you subtract those deductible business expenses from the income before you calculate either the taxes or the IRA contribution.
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by elcadarj »

MarkNYC wrote: Tue Jul 09, 2024 10:51 am It's not unusual for an employer to issue a 1099 to a temporary worker when they should issue a W-2, simply because it's more convenient for the employer. But the issuance of a 1099 does not, by itself, mean that the worker is engaged in a trade or business. The facts and circumstances of each situation are what matter.

Many taxpayers who receive a 1099-NEC who are not properly engaged in a trade or business just prefer to report self-employment income and pay the SE tax rather than risk an IRS inquiry, and the IRS will not object to this even though it may not be correct.
+1
Just paying the SE tax is probably less painful than filling out forms SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding and 8919, Uncollected Social Security and Medicare Tax on Wages, to get it corrected.
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by trueblueky »

MarkNYC wrote: Tue Jul 09, 2024 10:51 am
spaddlewit wrote: Tue Jul 09, 2024 6:49 am Let's say she is cut checks totaling $2,000 throughout the summer. They are not wages - they are contractor payments. She is not a household employee. She is not an LLC or an S Corp, so will be considered a Sole Proprietor. At the end of the year, she will need to send the IRS the full 15.3% employment taxes, since her employer is not sending anything to the IRS other than a W-9.
Not necessarily. If an activity is nonrecurring and not carried with continuity and regularity, the IRS will consider it a sporadic activity rather than a trade or business or profession which would be subject to self-employment tax. I would be curious what type of work by a 14-year old on their first summer job would rise to the level of conduct of a trade or business, thus subject to SE tax?

It's not unusual for an employer to issue a 1099 to a temporary worker when they should issue a W-2, simply because it's more convenient for the employer. But the issuance of a 1099 does not, by itself, mean that the worker is engaged in a trade or business. The facts and circumstances of each situation are what matter.

Many taxpayers who receive a 1099-NEC who are not properly engaged in a trade or business just prefer to report self-employment income and pay the SE tax rather than risk an IRS inquiry, and the IRS will not object to this even though it may not be correct.

And the law does not require that a non-employee worker pay SE tax in order to qualify for an IRA contribution. All that's needed is taxable compensation for services performed.
This is quite circular. One must have earned income to contribute to an IRA (exception for spouses).

Is there earned income that is subject to neither FICA nor SECA? (Assuming the $400 threshold is met and one is not clergy.)
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by MarkNYC »

trueblueky wrote: Tue Jul 09, 2024 12:40 pm
MarkNYC wrote: Tue Jul 09, 2024 10:51 am And the law does not require that a non-employee worker pay SE tax in order to qualify for an IRA contribution. All that's needed is taxable compensation for services performed.
This is quite circular. One must have earned income to contribute to an IRA (exception for spouses).

Is there earned income that is subject to neither FICA nor SECA? (Assuming the $400 threshold is met and one is not clergy.)
It's not circular, but the correct tax terms must be understood. What is required for an IRA contribution is "compensation" not "earned income." The two are not synonymous.

For IRA purposes:

1. Sec 401(c)(2) defines "earned income" as net earnings from self-employment in a trade or business.
2. Reg. 1.408A-3 Q & A-3 states that an IRA contribution is limited to the individual's "compensation" for the year
3. Q & A-4 of the same regulation defines "compensation" as follows...

"Q-4. How is compensation defined for purposes of the Roth IRA contribution limit?

A-4. For purposes of the contribution limit described in A-3 of this section, an individual's compensation is the same as that used to determine the maximum contribution an individual can make to a traditional IRA. This amount is defined in section 219(f)(1) to include wages, commissions, professional fees, tips, and other amounts received for personal services, as well as taxable alimony and separate maintenance payments received under a decree of divorce or separate maintenance. Compensation also includes earned income as defined in section 401(c)(2)..."

As the bolded wording above indicates, "other amounts received for personal services" is a category of compensation that will support an IRA contribution, separate and apart from wages or earned income. What might be some examples? Perhaps babysitting and other household income that does not require a W-2, hobby income, or a one-off activity with income for services provided, not rising to the level of a trade or business subject to SE tax. There can be others.
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by trueblueky »

MarkNYC wrote: Tue Jul 09, 2024 2:00 pm
trueblueky wrote: Tue Jul 09, 2024 12:40 pm
MarkNYC wrote: Tue Jul 09, 2024 10:51 am And the law does not require that a non-employee worker pay SE tax in order to qualify for an IRA contribution. All that's needed is taxable compensation for services performed.
This is quite circular. One must have earned income to contribute to an IRA (exception for spouses).

Is there earned income that is subject to neither FICA nor SECA? (Assuming the $400 threshold is met and one is not clergy.)
It's not circular, but the correct tax terms must be understood. What is required for an IRA contribution is "compensation" not "earned income." The two are not synonymous.

For IRA purposes:

1. Sec 401(c)(2) defines "earned income" as net earnings from self-employment in a trade or business.
2. Reg. 1.408A-3 Q & A-3 states that an IRA contribution is limited to the individual's "compensation" for the year
3. Q & A-4 of the same regulation defines "compensation" as follows...

"Q-4. How is compensation defined for purposes of the Roth IRA contribution limit?

A-4. For purposes of the contribution limit described in A-3 of this section, an individual's compensation is the same as that used to determine the maximum contribution an individual can make to a traditional IRA. This amount is defined in section 219(f)(1) to include wages, commissions, professional fees, tips, and other amounts received for personal services, as well as taxable alimony and separate maintenance payments received under a decree of divorce or separate maintenance. Compensation also includes earned income as defined in section 401(c)(2)..."

As the bolded wording above indicates, "other amounts received for personal services" is a category of compensation that will support an IRA contribution, separate and apart from wages or earned income. What might be some examples? Perhaps babysitting and other household income that does not require a W-2, hobby income, or a one-off activity with income for services provided, not rising to the level of a trade or business subject to SE tax. There can be others.
The instructions for Schedule SE, which is what taxpayers might read, mention income as a notary as an exception to SECA. It does not mention babysitting.

This does: https://www.irs.gov/newsroom/when-the-l ... -and-taxes
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by FiveK »

trueblueky wrote: Tue Jul 09, 2024 6:30 pm
MarkNYC wrote: Tue Jul 09, 2024 2:00 pmWhat might be some examples? Perhaps babysitting and other household income that does not require a W-2....
The instructions for Schedule SE, which is what taxpayers might read, mention income as a notary as an exception to SECA. It does not mention babysitting.

This does: https://www.irs.gov/newsroom/when-the-l ... -and-taxes
A Household Employee paid less than a certain amount by the employer is liable for neither the employee's nor employer's portion of FICA, but the income counts as compensation for IRA contributions and earned income for the earned income tax credit.
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by anon_investor »

spaddlewit wrote: Tue Jul 09, 2024 6:49 am Thanks everybody...although the last few posts have started to make me a little confused - maybe a hypothetical is a better example:

Let's say she is cut checks totaling $2,000 throughout the summer. They are not wages - they are contractor payments. She is not a household employee. She is not an LLC or an S Corp, so will be considered a Sole Proprietor. At the end of the year, she will need to send the IRS the full 15.3% employment taxes, since her employer is not sending anything to the IRS other than a W-9.

Is her maximum allowable IRA contribution $1,847 (2,000 - 7.65%), or is it the full $2,000?
Her maximum allowable IRA contribution would be $1,847 ($2,000 - 7.65%).
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by toddthebod »

anon_investor wrote: Tue Jul 09, 2024 7:24 pm
spaddlewit wrote: Tue Jul 09, 2024 6:49 am Thanks everybody...although the last few posts have started to make me a little confused - maybe a hypothetical is a better example:

Let's say she is cut checks totaling $2,000 throughout the summer. They are not wages - they are contractor payments. She is not a household employee. She is not an LLC or an S Corp, so will be considered a Sole Proprietor. At the end of the year, she will need to send the IRS the full 15.3% employment taxes, since her employer is not sending anything to the IRS other than a W-9.

Is her maximum allowable IRA contribution $1,847 (2,000 - 7.65%), or is it the full $2,000?
Her maximum allowable IRA contribution would be $1,847 ($2,000 - 7.65%).
No. See above.
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by MarkNYC »

trueblueky wrote: Tue Jul 09, 2024 6:30 pm
MarkNYC wrote: Tue Jul 09, 2024 2:00 pm
trueblueky wrote: Tue Jul 09, 2024 12:40 pm
MarkNYC wrote: Tue Jul 09, 2024 10:51 am And the law does not require that a non-employee worker pay SE tax in order to qualify for an IRA contribution. All that's needed is taxable compensation for services performed.
This is quite circular. One must have earned income to contribute to an IRA (exception for spouses).

Is there earned income that is subject to neither FICA nor SECA? (Assuming the $400 threshold is met and one is not clergy.)
It's not circular, but the correct tax terms must be understood. What is required for an IRA contribution is "compensation" not "earned income." The two are not synonymous.

For IRA purposes:

1. Sec 401(c)(2) defines "earned income" as net earnings from self-employment in a trade or business.
2. Reg. 1.408A-3 Q & A-3 states that an IRA contribution is limited to the individual's "compensation" for the year
3. Q & A-4 of the same regulation defines "compensation" as follows...

"Q-4. How is compensation defined for purposes of the Roth IRA contribution limit?

A-4. For purposes of the contribution limit described in A-3 of this section, an individual's compensation is the same as that used to determine the maximum contribution an individual can make to a traditional IRA. This amount is defined in section 219(f)(1) to include wages, commissions, professional fees, tips, and other amounts received for personal services, as well as taxable alimony and separate maintenance payments received under a decree of divorce or separate maintenance. Compensation also includes earned income as defined in section 401(c)(2)..."

As the bolded wording above indicates, "other amounts received for personal services" is a category of compensation that will support an IRA contribution, separate and apart from wages or earned income. What might be some examples? Perhaps babysitting and other household income that does not require a W-2, hobby income, or a one-off activity with income for services provided, not rising to the level of a trade or business subject to SE tax. There can be others.
The instructions for Schedule SE, which is what taxpayers might read, mention income as a notary as an exception to SECA. It does not mention babysitting.

This does: https://www.irs.gov/newsroom/when-the-l ... -and-taxes
I'm not quite sure what point you're trying to make with regard to babysitting income and self-employment tax, but I will add this, to expand on FiveK's comments.

A babysitter is generally considered a household employee, especially when it is a teenager who is a full-time student. If the parents pay the babysitter less than $2,600 for the year (2023) then there is no requirement for the parents to issue a W-2 or pay/withhold FICA. The babysitter should properly report the income on the 1040 on the wage line 1b, not subject to self-employment tax. If the full-year payment is more than $2,600 then a W-2 is required along with FICA payments, so the wage income gets reported on line 1a. Again, no self-employment tax.

Only if babysitting is the individual's principal occupation would the income properly be reported on Schedule C subject to self-employment tax. For a teenager who is a full-time student, the IRS does not consider babysitting the individual's principal occupation.
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by trueblueky »

MarkNYC wrote: Tue Jul 09, 2024 8:01 pm
trueblueky wrote: Tue Jul 09, 2024 6:30 pm
MarkNYC wrote: Tue Jul 09, 2024 2:00 pm
trueblueky wrote: Tue Jul 09, 2024 12:40 pm
MarkNYC wrote: Tue Jul 09, 2024 10:51 am And the law does not require that a non-employee worker pay SE tax in order to qualify for an IRA contribution. All that's needed is taxable compensation for services performed.
This is quite circular. One must have earned income to contribute to an IRA (exception for spouses).

Is there earned income that is subject to neither FICA nor SECA? (Assuming the $400 threshold is met and one is not clergy.)
It's not circular, but the correct tax terms must be understood. What is required for an IRA contribution is "compensation" not "earned income." The two are not synonymous.

For IRA purposes:

1. Sec 401(c)(2) defines "earned income" as net earnings from self-employment in a trade or business.
2. Reg. 1.408A-3 Q & A-3 states that an IRA contribution is limited to the individual's "compensation" for the year
3. Q & A-4 of the same regulation defines "compensation" as follows...

"Q-4. How is compensation defined for purposes of the Roth IRA contribution limit?

A-4. For purposes of the contribution limit described in A-3 of this section, an individual's compensation is the same as that used to determine the maximum contribution an individual can make to a traditional IRA. This amount is defined in section 219(f)(1) to include wages, commissions, professional fees, tips, and other amounts received for personal services, as well as taxable alimony and separate maintenance payments received under a decree of divorce or separate maintenance. Compensation also includes earned income as defined in section 401(c)(2)..."

As the bolded wording above indicates, "other amounts received for personal services" is a category of compensation that will support an IRA contribution, separate and apart from wages or earned income. What might be some examples? Perhaps babysitting and other household income that does not require a W-2, hobby income, or a one-off activity with income for services provided, not rising to the level of a trade or business subject to SE tax. There can be others.
The instructions for Schedule SE, which is what taxpayers might read, mention income as a notary as an exception to SECA. It does not mention babysitting.

This does: https://www.irs.gov/newsroom/when-the-l ... -and-taxes
I'm not quite sure what point you're trying to make with regard to babysitting income and self-employment tax, but I will add this, to expand on FiveK's comments.

A babysitter is generally considered a household employee, especially when it is a teenager who is a full-time student. If the parents pay the babysitter less than $2,600 for the year (2023) then there is no requirement for the parents to issue a W-2 or pay/withhold FICA. The babysitter should properly report the income on the 1040 on the wage line 1b, not subject to self-employment tax. If the full-year payment is more than $2,600 then a W-2 is required along with FICA payments, so the wage income gets reported on line 1a. Again, no self-employment tax.

Only if babysitting is the individual's principal occupation would the income properly be reported on Schedule C subject to self-employment tax. For a teenager who is a full-time student, the IRS does not consider babysitting the individual's principal occupation.
These are certainly different definitions than I've ever applied as a preparer, paid or volunteer.

Only one's "principal occupation" is reported on a Schedule C? Not a secondary one?
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by MarkNYC »

trueblueky wrote: Wed Jul 10, 2024 12:05 pm
MarkNYC wrote: Tue Jul 09, 2024 8:01 pm
trueblueky wrote: Tue Jul 09, 2024 6:30 pm
MarkNYC wrote: Tue Jul 09, 2024 2:00 pm
trueblueky wrote: Tue Jul 09, 2024 12:40 pm
This is quite circular. One must have earned income to contribute to an IRA (exception for spouses).

Is there earned income that is subject to neither FICA nor SECA? (Assuming the $400 threshold is met and one is not clergy.)
It's not circular, but the correct tax terms must be understood. What is required for an IRA contribution is "compensation" not "earned income." The two are not synonymous.

For IRA purposes:

1. Sec 401(c)(2) defines "earned income" as net earnings from self-employment in a trade or business.
2. Reg. 1.408A-3 Q & A-3 states that an IRA contribution is limited to the individual's "compensation" for the year
3. Q & A-4 of the same regulation defines "compensation" as follows...

"Q-4. How is compensation defined for purposes of the Roth IRA contribution limit?

A-4. For purposes of the contribution limit described in A-3 of this section, an individual's compensation is the same as that used to determine the maximum contribution an individual can make to a traditional IRA. This amount is defined in section 219(f)(1) to include wages, commissions, professional fees, tips, and other amounts received for personal services, as well as taxable alimony and separate maintenance payments received under a decree of divorce or separate maintenance. Compensation also includes earned income as defined in section 401(c)(2)..."

As the bolded wording above indicates, "other amounts received for personal services" is a category of compensation that will support an IRA contribution, separate and apart from wages or earned income. What might be some examples? Perhaps babysitting and other household income that does not require a W-2, hobby income, or a one-off activity with income for services provided, not rising to the level of a trade or business subject to SE tax. There can be others.
The instructions for Schedule SE, which is what taxpayers might read, mention income as a notary as an exception to SECA. It does not mention babysitting.

This does: https://www.irs.gov/newsroom/when-the-l ... -and-taxes
I'm not quite sure what point you're trying to make with regard to babysitting income and self-employment tax, but I will add this, to expand on FiveK's comments.

A babysitter is generally considered a household employee, especially when it is a teenager who is a full-time student. If the parents pay the babysitter less than $2,600 for the year (2023) then there is no requirement for the parents to issue a W-2 or pay/withhold FICA. The babysitter should properly report the income on the 1040 on the wage line 1b, not subject to self-employment tax. If the full-year payment is more than $2,600 then a W-2 is required along with FICA payments, so the wage income gets reported on line 1a. Again, no self-employment tax.

Only if babysitting is the individual's principal occupation would the income properly be reported on Schedule C subject to self-employment tax. For a teenager who is a full-time student, the IRS does not consider babysitting the individual's principal occupation.
These are certainly different definitions than I've ever applied as a preparer, paid or volunteer.

Only one's "principal occupation" is reported on a Schedule C? Not a secondary one?
Yes, I appear to have stated that incorrectly. If a babysitter is under 18 then no social security should be withheld unless babysitting is the worker's principal occupation.

Upon further thought, I'm not sure babysitting should ever be reported on Schedule C, because that would require the worker to qualify as self-employed rather than a household employee, and that would require that the babysitter controls how the work is done. Do parents ever give up "control" as to how the babysitting is done? Haven't seen this discussed but I doubt it.
toddthebod
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by toddthebod »

MarkNYC wrote: Wed Jul 10, 2024 12:37 pm Upon further thought, I'm not sure babysitting should ever be reported on Schedule C, because that would require the worker to qualify as self-employed rather than a household employee, and that would require that the babysitter controls how the work is done. Do parents ever give up "control" as to how the babysitting is done? Haven't seen this discussed but I doubt it.
That would be the fundamental difference between babysitting and day care.
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by trueblueky »

If she goes to the Smith house five days a week while school is out so the Smith(s) can work or attend college full-time, then she should be a household worker, receive a W-2 or 1099, have FICA withheld, etc. She must provide them documentation for the childcare tax credit.

If she goes works as an independent contractor, going to a different house each Friday and Saturday, setting her own rate, and so forth, she should file Schedule C.
Irene
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by Irene »

My interpretation, and I could be all wet here, is that the IRS citation above applies to traditional IRAs, meaning if you're already deducting half the self-employment tax from your earnings on your taxes, you can't also deduct it again when you take the IRA deduction. It doesn't make sense to me that it would apply to Roth IRAs, where you aren't taking a deduction at all.
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by tibbitts »

I'm pretty sure that after reading this thread, the OP's daughter has decided to just stay home and freeload off mom and dad until she's age 50 or so. We can chalk this up as another problem successfully resolved by Bogleheads.
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FiveK
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by FiveK »

Irene wrote: Wed Jul 10, 2024 7:12 pm My interpretation, and I could be all wet here, is that the IRS citation above applies to traditional IRAs, meaning if you're already deducting half the self-employment tax from your earnings on your taxes, you can't also deduct it again when you take the IRA deduction.
The 1/2 SE tax deduction occurs on line 15 of https://www.irs.gov/pub/irs-pdf/f1040s1.pdf, and only there, regardless of whether a traditional IRA deduction is also taken on line 20 of that form.

Is that what you mean?
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AllMostThere
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by AllMostThere »

tibbitts wrote: Wed Jul 10, 2024 7:32 pm I'm pretty sure that after reading this thread, the OP's daughter has decided to just stay home and freeload off mom and dad until she's age 50 or so. We can chalk this up as another problem successfully resolved by Bogleheads.
I read all these comments and became confused as heck. I was thinking something similar to your statement, but you put it perfectly. I can now go to sleep with a smile on my face. Goodnight To All And To All A Goodnight!! :beer
Stop thinking about what money can buy. Start thinking about what your money can earn. - Author JL Collins | Dream as if you’ll live forever. Live as if you’ll die today. - Author James Dean
rkhusky
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by rkhusky »

trueblueky wrote: Wed Jul 10, 2024 6:36 pm If she goes to the Smith house five days a week while school is out so the Smith(s) can work or attend college full-time, then she should be a household worker, receive a W-2 or 1099, have FICA withheld, etc. She must provide them documentation for the childcare tax credit.

If she goes works as an independent contractor, going to a different house each Friday and Saturday, setting her own rate, and so forth, she should file Schedule C.
Babysitting is never a student’s primary occupation. There is nothing in Pub 926 about working for only one family. In fact, many teenage babysitters work for multiple families, and the IRS knows that, and still calls them household employees.
trueblueky
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by trueblueky »

rkhusky wrote: Wed Jul 10, 2024 8:38 pm
trueblueky wrote: Wed Jul 10, 2024 6:36 pm If she goes to the Smith house five days a week while school is out so the Smith(s) can work or attend college full-time, then she should be a household worker, receive a W-2 or 1099, have FICA withheld, etc. She must provide them documentation for the childcare tax credit.

If she goes works as an independent contractor, going to a different house each Friday and Saturday, setting her own rate, and so forth, she should file Schedule C.
Babysitting is never a student’s primary occupation. There is nothing in Pub 926 about working for only one family. In fact, many teenage babysitters work for multiple families, and the IRS knows that, and still calls them household employees.
IRS Pub 926 is Household Employer's Guide. It discusses when an employer must withhold and pay Social Security and Medicare. It would apply to someone who hires a babysitter for the summer, as in the first case above.
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by rkhusky »

trueblueky wrote: Thu Jul 11, 2024 5:04 am
rkhusky wrote: Wed Jul 10, 2024 8:38 pm
trueblueky wrote: Wed Jul 10, 2024 6:36 pm If she goes to the Smith house five days a week while school is out so the Smith(s) can work or attend college full-time, then she should be a household worker, receive a W-2 or 1099, have FICA withheld, etc. She must provide them documentation for the childcare tax credit.

If she goes works as an independent contractor, going to a different house each Friday and Saturday, setting her own rate, and so forth, she should file Schedule C.
Babysitting is never a student’s primary occupation. There is nothing in Pub 926 about working for only one family. In fact, many teenage babysitters work for multiple families, and the IRS knows that, and still calls them household employees.
IRS Pub 926 is Household Employer's Guide. It discusses when an employer must withhold and pay Social Security and Medicare. It would apply to someone who hires a babysitter for the summer, as in the first case above.
Notwithstanding the title, the pub gives some information applicable to the employee. Better to use the pub’s definition, rather than make up your own definition.

The OP has stated daughter is not a household employee, so this is all off topic.
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anon_investor
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by anon_investor »

toddthebod wrote: Tue Jul 09, 2024 7:59 pm
anon_investor wrote: Tue Jul 09, 2024 7:24 pm
spaddlewit wrote: Tue Jul 09, 2024 6:49 am Thanks everybody...although the last few posts have started to make me a little confused - maybe a hypothetical is a better example:

Let's say she is cut checks totaling $2,000 throughout the summer. They are not wages - they are contractor payments. She is not a household employee. She is not an LLC or an S Corp, so will be considered a Sole Proprietor. At the end of the year, she will need to send the IRS the full 15.3% employment taxes, since her employer is not sending anything to the IRS other than a W-9.

Is her maximum allowable IRA contribution $1,847 (2,000 - 7.65%), or is it the full $2,000?
Her maximum allowable IRA contribution would be $1,847 ($2,000 - 7.65%).
No. See above.
So what is the correct answer since the daughter is not a household worker?
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by toddthebod »

anon_investor wrote: Thu Jul 11, 2024 11:54 am
toddthebod wrote: Tue Jul 09, 2024 7:59 pm
anon_investor wrote: Tue Jul 09, 2024 7:24 pm
spaddlewit wrote: Tue Jul 09, 2024 6:49 am Thanks everybody...although the last few posts have started to make me a little confused - maybe a hypothetical is a better example:

Let's say she is cut checks totaling $2,000 throughout the summer. They are not wages - they are contractor payments. She is not a household employee. She is not an LLC or an S Corp, so will be considered a Sole Proprietor. At the end of the year, she will need to send the IRS the full 15.3% employment taxes, since her employer is not sending anything to the IRS other than a W-9.

Is her maximum allowable IRA contribution $1,847 (2,000 - 7.65%), or is it the full $2,000?
Her maximum allowable IRA contribution would be $1,847 ($2,000 - 7.65%).
No. See above.
So what is the correct answer since the daughter is not a household worker?
It's either MarkNYC's $2,000 if you believe she does not owe SE taxes, or MP123's $1,858.71 if you believe she does.
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by momopi »

spaddlewit wrote: Mon Jul 08, 2024 9:13 pm My 14yo daughter has her first job this summer... but it's not a typical wage job - she's being paid as a contractor and will receive a 1099 from her employer at the end of year. We are going to open a Roth IRA account to contribute to, but it's unclear to me what the contribution limit would be.. she definitely will not be earning the $7000 contribution limit, and she has to pay medicare/SS herself when she goes to file taxes this year.

Is the sum of her checks being received by the employer considered her IRA contribution maximum? Or is it minus the 15.3% employment taxes?
If I'm not mistaken, the deadline for Roth IRA contribution is April 15th of following tax year.

So go ahead and open the Roth IRA account now and deposit $100. Don't try to open the account at last min.

When you go to your accountant to do 2024 taxes, have your accountant look over her paperwork and determine the correct amount. Take your daughter with you, it's a good learning experience.

Deposit the correct amount - $100 into her IRA account.
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FiveK
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by FiveK »

momopi wrote: Thu Jul 11, 2024 12:02 pmWhen you go to your accountant to do 2024 taxes, have your accountant look over her paperwork and determine the correct amount. Take your daughter with you, it's a good learning experience.
Or have the daughter do her own taxes, using a File your taxes for free | Internal Revenue Service option if the parent doesn't have a version the child can use. The amount to subtract from the $2000 will be on line 15 of Schedule 1.
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anon_investor
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Re: Teen Daughter with 1099 summer job - IRA contribution limit?

Post by anon_investor »

momopi wrote: Thu Jul 11, 2024 12:02 pm
spaddlewit wrote: Mon Jul 08, 2024 9:13 pm My 14yo daughter has her first job this summer... but it's not a typical wage job - she's being paid as a contractor and will receive a 1099 from her employer at the end of year. We are going to open a Roth IRA account to contribute to, but it's unclear to me what the contribution limit would be.. she definitely will not be earning the $7000 contribution limit, and she has to pay medicare/SS herself when she goes to file taxes this year.

Is the sum of her checks being received by the employer considered her IRA contribution maximum? Or is it minus the 15.3% employment taxes?
If I'm not mistaken, the deadline for Roth IRA contribution is April 15th of following tax year.

So go ahead and open the Roth IRA account now and deposit $100. Don't try to open the account at last min.

When you go to your accountant to do 2024 taxes, have your accountant look over her paperwork and determine the correct amount. Take your daughter with you, it's a good learning experience.

Deposit the correct amount - $100 into her IRA account.
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