Minor tax

Forum|Forum|4 years ago
March 30, 2022
2 replies
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I paid my kid (5 years old) for practicing piano and performing in family gathering, as well as washing car for me, for a total of $550 in 2021. Should I consider him independent contractor or household employee? (I do not have a company of my own/ my family). I ask because I want to contribute Roth IRA for him and I saw online comment that even grandparent asking grandson to do laundry, the money can be qualified for Roth IRA. I do not understand how the grandparent file tax for the grandson then.. or do they even need to file tax for him?

In my case, if I do need to file tax for my kid, which form I should use? Many thanks for the advice..

ColeenD3

Level 15

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.

With W-2 income, he can contribute to a Roth IRA. While he is not required to file a return, you must keep track of his basis in the IRA.

Nat40Author

Level 2

Thank you for your reply! If I do not have a company, can I issue W2 to my kids? Do I have to include that in my own tax? Do I have to withhold any tax/medicare for my kids?

So the kids who get W2 totalling $12400 and below do not require to file tax am I correct?

Also, for performing piano in family gathering, does it count as independent contractor or self employment for my kid? What if the kids walk the dog for my extended family?

My last question, from this link: https://dechtmanwealth.com/roth-ira-for-kids/

It seems the professional there suggest there is not necessary a W2, simply a notebook recording the date/ amount/ service provided is suffice for proofing the income of kids, is that correct?

Thank you very much

GeorgeM777

Level 11

Yes, you can issue a W-2 to your children. And yes, you deduct the wages you pay your children as a business expense on your Schedule C.

You can obtain a copy of a W-2 from the IRS website. If you would rather file the forms electronically, you must create an account through the Social Security Administration website, which allows you to create and submit Form W-2 online. To create an account and begin using the online form, refer to the Social Security Administration – Business Online Services website. You can also mail the W-2 to the Department of the Treasury, Internal Revenue Service.

Regarding whether your children need to file a tax return depends on whether you claim them as a dependent or not. If claimed as a dependent, according to the IRS, their standard deduction is as follows:

Dependents – If you can be claimed as a dependent by another taxpayer, your standard deduction for 2021 is limited to the greater of: (1) $1,100, or (2) your earned income plus $350 (but the total can't be more than the basic standard deduction for your filing status).

Even if your children do not need to file a return, if you made tax withholding on their behalf, of if your children made estimated tax payments, they will need to file a return to receive a refund of their tax withholding.

Whether your children are your employees or independent contractors is a factual issue. Generally, if you control what is done and how it is done, then your children are likely to be your employees.

Regarding whether to document your payments through a W-2, a notebook entry, or some other form of documentation is a request for advice beyond which we can provide. However, a W-2 does get filed with the IRS, as do Forms 1099-Misc and 1099-NEC, and given that fact, documents of this type may have greater evidentiary weight.

@Nat40

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taxlady28

Level 10

Don't believe everything you read on the internet.

Roth Rules for Kids | Kiplinger

ColeenD3

Level 15

It is not an allowance if they are paid to do a specific job. It is not an allowance if they issue a W-2. They are not required to issue a W-2 but if they wish to contribute to an IRA, they will need proof of compensation.

Wages, salaries, etc. Wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services are compensation. The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2.

A Roth IRA for Kids provides all the benefits of a regular Roth IRA, but is geared toward children under the age of 18. Minors cannot generally open brokerage accounts in their own name until they are 18, so a Roth IRA for Kids requires an adult to serve as custodian.

The custodian maintains control of the child's Roth IRA, including decisions about contributions, investments, and distributions. In addition, statements are sent to the custodian. However, the minor remains the beneficial account owner and the funds in the account must be used for the benefit of the minor. When the minor reaches a certain required age, typically either 18 or 21 in most states, the assets must be transferred to a new account in their name.

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