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Author: lfharris Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 120809  
Subject: setting up Roth for Children Date: 10/4/1999 1:19 PM
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I understand that your child can have a Roth IRA if the child has income. I have several rental houses and could "pay" my child for misc. services done at the properties. What I need to know is how do you document such payments and what else must be done -- I do not use a schedule C for rental income -- would I have to report their "income" on W-2's and withhold taxes, etc
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Author: hghcpa Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19348 of 120809
Subject: Re: setting up Roth for Children Date: 10/4/1999 9:08 PM
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I understand that your child can have a Roth IRA if the child has income. I have several rental houses and could "pay" my child for misc. services done at the properties. What I need to know is how do you document such payments and what else must be done -- I do not use a schedule C for rental income -- would I have to report their "income" on W-2's and withhold taxes, etc
*****

Payments to your minor child for services performed in your unincorporated business are not subject to FICA, Medicare, and FUTA taxes.

There are some basic requirements though in order for these payment to be considered valid deductible expenses for your schedule E.

1 - The payments must be reasonable in relation to the services performed. IOW - a 6.00 per hour job should not be paid 66.00 per hour.

2 - The services must actually be performed by the child and adequate records should be retained in order to document this fact.

3 - The employer (YOU) should file all necessary quarterly and year end payroll tax returns.


The primary advantage of doing this is that you receive a tax deduction for the wages while the minor child reports the income. The tax savings comes into play in that you likely are in a higher bracket than the child and the income is therefore taxed at the child's lower effective tax rate. If the wages paid to the child are as a result of expenses on a Schedule C then the savings can be even more dramatic since the deduction can potentially save FICA and Medicare taxes for the parent.

I also understand from a previous post on the subject that payments to a child for domestic services can also be used for this purpose. Although one should think long and hard about this last alternative ---- at least if your kids keep house the way mine do..
They would be fired after day one on the job.


Pete


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Author: RIBBIT1 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19372 of 120809
Subject: Re: setting up Roth for Children Date: 10/5/1999 1:49 PM
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I think you would file form 941 for your children's tax withholding, and check box 8 to indicate that wages are not subject to Social Security or Medicare taxes. As the the other post indicated, minor children ( < 18 yrs) are not subject to these taxes, and < 21 not subject to FUTA. The details are in publication E. Sounds like if you are willing to do the 941 and w2 paperwork, you've gotten yourself a nice little (and legal) tax dodge. More power to you, and good luck.

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