Hi All, I would like to give $6,000 to my mother in law for her help with my baby in 2019 for her to put into a roth IRA. She received her Employment authorization document in late 2019 (non-US citizen) and has a SSN so I think this will work. It would be considered her only income for 2019 so wouldn't have to file personal tax returns with her income being under the standard deduction limit. Is there anything I am missing before I open up a roth IRA account for her? Thanks!
If you are giving the money to her as a gift there’s no problem. If she is receiving the money as payment for child care she will owe self employment tax on that income. So I assume that the money is a gift.
Thanks for your answer. Based on hours of research I don't think I can gift her the $6,000 to put into a roth IRA since she needs "income" to make a roth IRA contribution. I also think she is exempt from taxes on this income due to an exception . Just trying to support her retirement and it is so difficult to sorth through this tax mess !
1. If it is a gift then my Mother in law could not use that gift money to contribute to an IRA. Only taxable compensation can be used to contribute to an IRA.
2. If I give the $6,000 to my mother in law as income then it is not subject to income taxes / self employment taxes:
Contributions to retirement accounts, ROTH or otherwise are based on "EARNED" income. If you "give" your MIL the money, she didn't earn it and therefore can't count it towards a retirement contribution. If she provided daycare in your home, then she's a household employee that would would need to do paperwork for, as well as withhold and pay taxes on the income you pay her, and issue her a W-2. You'll need professional help for that, especially if your state taxes personal income as that will more than double your paperwork.
Otherwise, if you issue her a 1099-MISC with the amount you paid her reported in box 3, she' report that as self-employment income on SCH C as a part of her personal 1040 return. Then it's earned income and she can contribute to a retirement account based on that earned income.
Either way, you have a deadline of Jan 31st to issue the W-2 or 1099-MISC.
A grandparent who babysits in the parents home, is exempt from the "nanny tax" (social security and medicare tax) on her income. If you want to take advantage of this, the parent must issue a W-2 and not a 1099-MISC
Assuming she watches the child in your home, she would be a Household Employee.
It is now 2020. Paying her now would be income for 2020, not 2019. It doesn't matter when the work done, it matters when it was paid.
Because it seems she had no income in 2019, she does not qualify to open an IRA for 2019.
If you decide to hire her for watching your child in 2020, be aware that your State could require State Unemployment insurance, Worker's Compensation insurance, and/or disability insurance. You may also be required to pay her a fair wage and pay her at regular intervals and likely other requirements as well. All of these rules vary by State.
In the event that you are not currently married (such as divorced or your spouse died), that situation would also be subject to Social Security and Medicare taxes.