@wife-mom-math wrote:
A follow up question on this:
I'm in a similar situation: we own an Etsy shop, but it's actually my 15 yo's business, she's the one who created the products and answered customers' questions. However since she's a minor, all the legal/finance info is under my name.
Is there anyway for parents to generate W-2 so that the child has an earned income so she can open a custodial ROTH IRA?
Thank you.
If only your child runs the business, then only your child reports the business, even if the 1099K is issued in your name for other reasons.
Your child will file a schedule C to report their gross income and expenses, and pay income tax and self-employment tax on the net profit. Her gross income is all her income from business, even if some of it is not listed on the 1099-K. Her expenses are "ordinary and necessary" expenses for the type of business she is engaged in, and can include purchasing supplies and inventory, shipping costs, credit card processing fees, and other costs. She pays 15% self-employment tax on the net profit, and the net profit is also added to any other taxable income to determine if she also owes income tax. (If her total taxable income is less than $13,850, she might not owe income tax, but will still pay self-employment tax.)
Then, about 92% of her self-employment income will count as "compensation" that will support a Roth IRA contribution into an account in your daughter's name. There is no need to have a W-2 (and no legal way to issue one in this case).
You will list the 1099K on your return if it came in your name, but then you make an adjustment to zero it out so it is not taxable to you.
If this is a partnership, where both partners have invested in or materially participate in the business, then the partnership needs to file a form 1065 partnership return (due March 15, not April 15!). As part of the partnership return, each partner will receive a K-1 statement listing their share of income and expenses, that they put on their personal tax return. Here again, the K-1 figures determine net profit from business activity, and about 92% of your daughter's net profit from self-employment will count as compensation to allow a Roth IRA contribution.
