Funding a custodial Roth IRA for children

[jyeh74]

My friend sent me this link https://www.marottaonmoney.com/fund-your-childs-roth-with-chore-income/ 

She is trying to open up a custodial Roth IRA for her young kids to teach them the value of saving at an early age and pay them to do chores around the house.  It says that the first decision that must be made is how the child will be hired.  When it comes to chores, there are two main options.

1. The child may be a self-employed independent contractor.
2. The child may be a household employee of their parents.

Number 1 seems like it is not realistic since they would have to report income and pay taxes on schedule SE.  Not sure why any parent would want to make their child an independent contractor just to do chores around the house?  Number 2 is what she is thinking that she wants to do.  Essentially pay her kids to do chores around the house.  Question is, if she is paying her kids cash, does she have to create a log for her kids for every single chore?  i.e. Pay $20 to wash the car on this date.  Pay $10 to clean the kitchen.  If she is going to pay them up to the limit of $6000 annually for numerous jobs, does IRS usually check these things or does she have to report it on her 1040?

[jyeh74]

Also, if she is paying $6,000 to her child annually, does her child have to report taxes when they are a household employee?

[ColeenD3]

Child employed by parents.(p13) IRS family help

Payments for the services of a child under age 18 who works for his or her parent in a trade or business aren't subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child.

 If these payments are for work other than in a trade or business, such as domestic work in the parent's private home, they’re not subject to social security and Medicare taxes until the child reaches age 21.

 Payments for the services of a child under age 21 who works for his or her parent, whether or not in a trade or business, aren't subject to FUTA tax. Payments for the services of a child of any age who works for his or her parent are generally subject to income tax withholding unless the payments are for domestic work in the parent's home, or unless the payments are for work other than in a trade or business and are less than $50 in the quarter or the child isn't regularly employed to do such work.

[jyeh74]

Since the children are not working for the parent’s business, it is more domestic chores around the house, then it sounds like the child does NOT have to do any taxes and neither does the parent need to report paying her children for the domestic work done.  And it will be a few thousand a year.  The annual limit is $6,000 from what I understand.  If it’s paid in cash or a deposit into the child’s Roth IRA, then what is the recommendation to log the work (if any?). 

[ColeenD3]

"unless the payments are for work other than in a trade or business and are less than $50 in the quarter"

If the children are being paid $6,000 per year, then that is more than $50 in a quarter. Also, in order for the IRA to register, there has to be earned income of $6,000 shown on a tax return. The proper way is by Form W-2. They are being designated as household workers. 

Should they choose to issue the 1099-NEC, the contribution will be limited by one half the SE tax that they will pay.

[jyeh74]

I don’t follow.  Didn’t you say that Payments for the services of a child of any age who works for his or her parent are generally subject to income tax withholding unless the payments are for domestic work in the parent's home?

Since this is for domestic work in the parents home, the child does not have to pay taxes, even if it’s $6,000 a year.  But you’re now saying the parents have to issue a W2 or a 1099 NEC?  Doesn’t doing this require a tax to be paid since the domestic work is now official earned income?  I thought domestic work doesn’t need a 1099 or W2? How do one even issue a 1099 if you don’t own a company?

[ColeenD3]

What I am saying is that in order for this to be earned income for the purposes of contributing to an IRA, there has to actually be earned income on the child's return.

[jyeh74]

So a child has to do his or her taxes for $6000 earned income and Roth IRA contribution a year?  I thought if earned income is less than few thousand (can’t remember exact amount) you don’t have to do taxes at all.

[jyeh74]

I just looked it up.  Single filer (child) only has to report taxes for 2020 if over $12,400.  $6000 earned income is less than that so you don’t have to report.

[jyeh74]

@ColeenD3 If a parent is paying their child cash, for doing household chores, as a "household employee" not "independent contractor", then the parent should NOT have to write a W2 or a 1099.  It's cash deposited into the kid's savings account.  That cash is considered earned income.  And from your own turbo tax link, it states that earned income for dependents, and for single filers, only need to be reported if the earned income is greater than $12,400 a year.  $6000 a year max limit is definitely lower than $12,400 a year.

Here is your own turbo tax link

turbotax.intuit.com/tax-tips/irs-tax-return/does-everyone-need-to-file-an-income-tax-return/L7pluHko...

I will copy it here

When a dependent (child or adult) may need to file a tax return

Taxpayers who are claimed as a dependent on someone's tax return are subject to different IRS filing requirements, regardless of whether they are children or adults. A tax return is necessary when their earned income is more than their standard deduction.

The standard deduction for single dependents who are under age 65 and not blind is the greater of:

• $1,100 in 2020
• Or the sum of $350 + the person's earned income, up to the standard deduction for an unclaimed single taxpayer which is $12,400 in 2020.

A dependent's income can be "unearned" when it comes from sources such as dividends and interest. When a dependent's unearned income is greater than $1,100 in 2020, the dependent must file a tax return.

[Coolkids007]

@jyeh74  @ColeenD3 
I’m really confused. 

The original question has 2 questions in it. I actually looking for answers for the same 2 questions.

1.how to / how detailed the log for household chores?

2. is there a need for kids to file income tax?

 If I have missed the answer, please direct me to it. 

thanks for patience and efforts

[jyeh74]

@Coolkids007 from speaking to professionals, it’s good to have a log.  Date, chores, how much pay per hour or how much pay for project.

From what I gather, single filers who make less than $12,400 of earned income per year are not required to report their taxes.  If you pay your child $1000 or $100 for doing chores in your household, are you taxing them social security and Medicare?  I can’t see a case where the answer is yes.  Then are you supposed to write them a 1099?  Probably not.  It’s straight cash.  But it’s still considered earned income for the child.  Does the child report it if they want to contribute $1000 or $100 to their Roth IRA?  Colleen is saying that the child has to report their taxes if they want to contribute that amount to their Roth IRA.  But where does it say that earned income, paid in cash, not in a 1099 that is reported,  doesn’t count toward Roth IRA contributions?  

[Coolkids007]

Hello @ColeenD3 , any further thoughts or advice on which turbo tax products is used to handle this situation?

[jyeh74]

@Coolkids007 
These articles should help demonstrate that your child doesn’t need to do their taxes for their earned income to be actually counted as earned income for purposes of contributing  to their Roth IRA.  Cash counts as earned income.

https://www.marottaonmoney.com/do-children-need-to-file-a-tax-return-to-fund-their-roth-ira-2020/

www.kiplinger.com/article/saving/t046-c001-s001-proving-a-child-has-income-for-a-roth.html

[ColeenD3]

No, the kids are not required to file a return due to income. I was thinking more along the lines of letting the IRS know that the account has been opened and keeping track of it.