Custodial Roth/IRA for helping with property management

[mgranp]

Hello,

I have a 9-year-old who helped me with cleaning/power washing a property during turnover. She also helps me with paperwork, managing the online listing, and scheduling appointments. 

I believe I can open a Custodial ROTH/IRA for her to pay for the services. Are there any rules of thumb to follow for how much I can contribute? I don't think I can justify her spending enough time to qualify for the annual max of $6000. Can I pay her local minimum wage for the approximate number of hours of work put in? Approx $16/hour * 60 hours = $960.

I am based in California and the property is owned in the name of me and my wife's trust. We actively manage the property without any property managers.

Is pre-tax or post-tax retirement account better for them. Do I need to issue a 1099-MISC. Any other compliance items I need to take care of.

Thanks 

[Bsch4477]

It is preferable to pay your child with a W-2. When paid on a W-2, neither you nor your child will be required to pay Social Security or Medicare taxes. Also, you will not have to pay unemployment taxes.

Since she would pay no tax at her level of income the deduction for a traditional IRA would not help her so a Roth would be a better choice. You might have trouble finding a financial institution that offers an IRA with less than a $1,000 contribution since you can only contribute a maximum of her earned income or $6,500 whichever is less. 

[Mike9241]

@mgranp 

Parents can deduct wages paid to a child as a business expense only if the compensation is reasonable for the work performed. A parent is not required to pay minimum wage (an exception to the FLSA), but should pay a reasonable rate. It is highly advisable to document the hours that the child works and the type of services

If the parent is a sole proprietor or the company is a partnership in which each parent is a partner, any amount of wages paid to a child under age 18 is exempt from FICA and Medicare  [IRC section 3121(b)(3)(A)]. Wages paid to a child under age 21 are exempt from federal unemployment tax [IRC section 3306(c)(5)]; however, these exemptions do not apply if the parent’s business is a corporation or a partnership wherein any partner is not a parent of the child.

notice that "trust" is not mentioned above. also, I don't know what CA rules are. so you can wait to see if there are clarifying responses otherwise check with a tax pro. 

It is also likely that the Trust would have to file for an EIN (if it doesn't already have one) and file the required payroll tax returns. even if only to report wages. and at year end file a w-2 for her.  I think that issuing a 1099-NEC would be inappropriate. 

[Opus 17]

Your child can only contribute to an IRA if they have compensation from working.  Working for your company would satisfy that rule, provided you follow the other rules as described above.  I also agree that a W-2 would be better than a 1099-NEC; however, a 1099-NEC would also work.  (But she will have to pay self employment tax, and her compensation is 92% of her self-employment income.

Whether the IRA is in her name, or a trust, or a custodial account, raises legal issues that I can't comment on.  

[mgranp]

Thank you all for the response. This has been very helpful so far. I am new to this and have some more follow up questions.

1. I do not have a company. Me and my wife have W2 jobs and we have the rental property that we manage. Can we still issue a W-2.  

2. What is the smoothest way to issue a W-2. Can we use Intuit to do this, or should we go with a payroll processing company.

[Bsch4477]

https://ttlc.intuit.com/community/taxes/discussion/can-a-version-of-turbotax-create-w-2-and-w-3-form...

[Opus 17]

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@mgranp wrote:

Thank you all for the response. This has been very helpful so far. I am new to this and have some more follow up questions.

1. I do not have a company. Me and my wife have W2 jobs and we have the rental property that we manage. Can we still issue a W-2.  

2. What is the smoothest way to issue a W-2. Can we use Intuit to do this, or should we go with a payroll processing company.

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As a schedule E landlord, you can hire someone to help manage the property, either as a contractor or as a W-2 employee, this becomes one of your rental expenses.  To hire W-2 employees, your business must have a federal EIN (employer identification number), you can get one online at the IRS web site.

https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-n...

Whether or not you can handle the various regulations about hiring employees that may apply in your state (plus the exceptions for hiring family) depends on how much time you want to take to learn all the rules, versus the money it would cost to have an accountant do it for you.  Turbotax home&business (desktop) or Turbotax self-employed (online) can prepare W-2s for employees, but you may have other obligations.  I would really suggest consulting an accountant, at least in the first year,. 

[mgranp]

Thank you all for the help. This thread has been amazing in helping me.  Based on this advice I am opening a Custodial Roth at my bank and have also received an EIN from IRS. 

I am looking at more information of what is needed on the W2:

1. I am in California. What is my state id number. Where can I get this from.

2. There will be zero taxes deducted because the income will be very small. 

3. I am planning to issue a check to my child which is then deposited to her Roth. Is this OK or should I be issuing a check directly to the Roth. Should there be any other deferrals or information pertaining to this mentioned on the W2.

Regards. 

[DaveF1006]

Yes, you will need to register here.  Once registered, you must verify your e-mail address with them within 24 hours of enrollment. Upon e-mail verification, you can then apply for the SEIN/Tax ID#itself, which you must do by logging in on the same page that you began the sign-up process from. 

Past the log-in page, you will find a page where you can select “Register for Employer Payroll Tax Account Number.” Selecting this will bring you to a page prompting you to provide information concerning your business, like its business entity type, its industry, and its federal EIN.

For an custodial IRA account, you do not need to report this on a W2. You also may issue the check in your daughter's name and then deposit the check into your Custodial Roth account.

@mgranp