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Don't forget a roth ira for your young kids/grandkids that are old enough to work but do not have a W-2.

You DO NOT need an W-2 to set up a Roth. If a 12-year old made $700 by babysitting, that is earned income, and entitled to go into a Roth.

I knew of one fund family, Heartland, which would get a Roth going for you with $1,000. So, if your son made $500 in 2011 and will make $500 in 2012 mowing lawns on the week-end, that will suffice for the $1,000 minimum deposit.

If you want to claim that your 4-year old made $6,000 last year from plowing snow.....??? Well, that just might be pushing it a bit.

The Roth is a great break to get money growing tax free for 50 years or more if you set one up now for the adolescents.

For the doubters here, please DO NOT respond to this post saying people need to pay into FICA and Medicare and need a W-2 to have a Roth...because you do not know what you are talking about. Read Publication 926 about having someone under age 18 doing household work.
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Note that the work must be outside the home. A child babysitting their sibling or cutting their own lawn is considered doing family chores and their income as an allowance rather than earned income.

On the other hand, if the start up a babysitting service or leaf raking/snow clearing business with clients from the neighborhood, that is earned income and they can contribute to a Roth IRA or a Traditional IRA up to the amount they earned or the individual cap of $5000. Or their parents/grandparents can gift or match the contribution as an incentive to save.

Fuskie
Who notes, however, that this income has to be reported on their income tax in order for their eligibility to be established, although given their tax bracket, this probably should not be a big concern...
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I understand that a W-2 or 1099 isn't required. What I don't understand is if they are earning more than $400, why self-employment taxes aren't a concern.
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Read exceptions to FICA requirements in pulication 926
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I understand that a W-2 or 1099 isn't required. What I don't understand is if they are earning more than $400, why self-employment taxes aren't a concern.

It's our old friend Facts and Circumstances. Household employees under 18 are exempt from FICA/Medicare/FUTA. So, on the easy front, babysitting in the child's home will fall into this category. I haven't looked into Pub 926 to see what, if any, requirement there is for the employer to file a W-2, but with or without a W-2 this is line 7 earned income on the 1040.

As a side note to Fuskie's (I think) comment regarding the child's need to file a return to justify, if you will, the IRA contribution, a return is not required if the child doesn't have enough income to require a return. I wouldn't bother unless the IRS challenges the IRA contribution for lack of earned income, in which case I'd file going forward. Others like to head them off in the first place by filing.

Now back to FICA/Medicare. Anyone of any age who "runs a business" is subject to Self-Employment Tax. Facts and circumstances dictate whether the law mower is a household employee of his customers or she is a budding entrepreneur running a business. The common law questions which feed this determination are in Form SS-8.

Phil
Rule Your Retirement Home Fool
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""""Note that the work must be outside the home. A child babysitting their sibling or cutting their own lawn is considered doing family chores and their income as an allowance rather than earned income""""


I'll wager you are soooooooooo wrong on in your above statement. Show me the IRS reference to support your statement.
Earned Income must be for a service. If your son/daughter watches TV all day and gets $5.00 a week, that is not earned income. If you pay your son/daughter to mow the lawn or wash the car every saturday, that IS EARNED INCOME and eligible for a Roth IRA contribution.
Kids work for and are paid by their parents all the time.

A tax return is not required to contribute to an IRA. BUT, it might be a good idea, just in case.
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""Income from a parent's business
What if the parent is the employer? The fact that the income comes from a parent doesn't disqualify it, although the IRS may take a closer look in cases like this.

There have been a number of court decisions dealing with parents who paid children to work in the parent's business. None of them deal with the Roth IRA, though. These cases generally deal with the parent's deduction for the amount paid to the child. The Tax Court has allowed the deduction when it was convinced that the parents paid fair compensation for work actually performed in a real business. When the compensation wasn't a reasonable payment for work actually performed or didn't relate to a business, the deduction wasn't allowed. Bogus compensation won't support a contribution to a Roth IRA, either.

Household Chores
Why not use a child's earnings from household chores to meet the earned income requirement? Let's make some favorable assumptions:

¦The child is actually doing work for the money.
¦You're paying only a reasonable hourly rate for the work.
¦You have good records to prove that the work was done and the money paid.
Will that do the trick? Strangely enough, there's no clear guidance on this issue""


""It's difficult to prove this income isn't taxable. The Internal Revenue Code says all income is taxable unless an exception is made, and there's no exception for amounts paid by parents to family members for household chores"""

These segments are from a google search. The author gives the OPINION that household chores are not earned income. But its just that, an OPINION. The author say the IRS does not address the issue, so I'm not going to search the IRS site. I did look at the IRA publication, and I find nothing that prevents earned income paid by a parent for household chores not being eligible to go into a Roth IRA.
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Note that the work must be outside the home. A child babysitting their sibling or cutting their own lawn is considered doing family chores and their income as an allowance rather than earned income.

Pub 926 implies that this is wrong. It speaks specifically to the exemption from FICA/Medicare of household employee wages you pay your child under 21.

Something that hasn't been mentioned in this thread is that the employment tax exemption extends to some cases in which you hire your child to work at your business. Details are in Pub 15.

Something else that hasn't been mentioned in this thread is reasonableness. If you claim to be paying your 16 year old $100 per hour to babysit or sweep up the office, there may be some raised eyebrows in your future.

Or, as we say in Kansas, pigs get fat, hogs get slaughtered.

Phil
Rule Your Retirement Home Fool
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""It's difficult to prove this income isn't taxable. The Internal Revenue Code says all income is taxable unless an exception is made, and there's no exception for amounts paid by parents to family members for household chores"""

I'm not sure the source of this comment, but the payments we've been discussing are most certainly taxable for income tax purposes, from 50 cents up. The exemptions have to do with employment taxes. Following through on that, it's the fact that the payments are "taxable compensation" that allows them to be the basis for an IRA contribution.

Whether the child must actually pay any income tax depends on total income for the year. A dependent child's standard deduction can be as much as a non-dependent's standard deduction if there's enough earned income. For details on the standard deduction and filing requirements for dependents, see the 1040 instructions.

Phil
Rule Your Retirement Home Fool
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