Minor tax

[Nat40]

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]

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.

[DanP0428]

Don't believe everything you read on the internet.  

Roth Rules for Kids | Kiplinger

[ColeenD3]

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.

Roth 

[Nat40]

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]

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

[Nat40]

Thank you so much @GeorgeM777 GeorgeM777!

So now I know if I do not own business, I can still file W2 for my kids. And I can deduct the payment from my own tax, am I correct?

You mentioned their standard deduction is $1100 only but not $12550 if I claim them as dependent. Yes I will claim them as my dependent. Therefore if I pay them over $1100 I need to give them W2 and they have to file tax right? Because I heard that if I pay under $2000 to household employee (like nanny) I do not need to file W2.

In my case, I just paid them $550, is there anything I have to do this year in tax for them? Do I need to mention anything in my own tax as well? Thank you!

[DianeW777]

No. You cannot deduct the payments to your children on your tax return because you do not have a business activity you are paying them to work in.  The W-2 would have your social security number (SSN) for the payer identification number since you do not have a business and there are no required payments to be made to the IRS.  Simply complete the W-2(s) and the W-3 which is a transmittal.

• Form W-3 (Address is on this form)
• Form W-2
• SSA Online Filing

The child is not required to file a tax return for 2021 if you issue a W-2 because their income would be below the filing requirement.

Filing requirement for dependents 2021:  You must file a return if any of the following apply.

• Your unearned income was more than $1,100.
• Your earned income was more than $12,550.
• Your gross income was more than the larger of—
  • $1,100, or
  • Your earned income (up to $12,200) plus $350.

As indicated by Tax Expert @GeorgeM777 the standard deduction for dependents: 

• 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-$12,550 for 2021).

[Nat40]

Thank you for replying! So I don't have to mention anything on my tax and I don't have to file tax for my kids. You mentioned I have to file W2 and W3 for them as a transmittal. But is it too late to do that given the payment was made for the previous calendar year?

If, just curious, if next year my kids earn more than $1100 from me ( I do not have a business), do I have to mention anything on my tax? I assume I have to file tax for my kids and give them W2 and W3?

Thank you.

[ColeenD3]

W-2 income is earned income, not unearned. You file W-2 and W-3 in the year after the year you paid them, just like you file your taxes the year after.