@jyeh74
I think you should get professional tax representation, we are going into gray areas that could get you or your children in trouble, and I don’t think we are competent to professionally advise you.
While it is true that your child would not be required to file tax return for income under $13,000, the question is what will you tell the IRS if they decide to audit your children’s Roth IRA’s. You are not required to issue a W-2 to a household employee who is your child under age 18. however, the child should file a tax return listing their household income on form 1040, line 1b. You are correct that they will not owe income tax if their income is less than $13,000. By filing tax return with the household employee income on line 1b, that will demonstrate to the IRS that they have compensation from working to support the Roth IRA contribution. Or, if they are independent contractors, such as mowing lawns for neighbors or doing babysitting, they would be required to file a tax return with a schedule C. They do not pay income tax if their income is less than $13,000, but they must pay self-employment tax if their income is more than $400. This would also constitute proof for the IRS that they performed work for compensation.
One of the experts on this forum recently said that the IRS is too busy to track down every little problem with a Roth IRA. I do not endorse this view for the simple reason that, if your child never files a tax return, then the statute of limitations never starts to run. Potentially, the IRS could audit them 80 years from now, and assess 80 years worth of penalties for disallowed Roth IRA contributions if they can’t prove with sufficient records that they performed work for compensation. (Do I think this is likely to happen? No. Is it legally and technically possible? Yes.)
What you do with this information is up to you.
