Paying a minor dependent for babysitting

[kretiv]

This is a 2021 tax question.

Since January, 2021, parents pay a minor teenaged son to babysit his permanently disabled younger sibling in their own home for a few hours each week. He is being paid in cash at the end of each month. However, there is no formal agreement of employment here.

Minor also began a part-time job outside the home in October, 2021, and the employer / business will likely be issuing a W-2 at the end of the year.  Business pays minor via direct deposit. 

1. How do parents determine if the minor "provided more than half his own support for the year"? Minor lives at home full-time with both parents and attends high school. His income is usually spent on his wants & needs, such as electronic games, clothes, movie nights out with friends etc. 

2. Do parents need to withhold any taxes and issue a W-2?

Minor has a projected combined income of around $7000 between both jobs for the year - likely to be around $5500 from the year-long babysitting job and likely $1500 from the outside job since October. We will only know final income numbers on Jan 1, 2022. 

3. Should he file his own taxes? If he opens a Roth IRA for 2021, would he be required to file his own taxes? 

Thank you very for your advice you can give us.  

[xmasbaby0 · Accepted solution]

You have several questions--but there is one that you should have asked and did not ask.   If you are hoping to get the child care credit on your own tax return, you cannot get that credit for paying your own dependent to provide the child care.   So if your teenage child is the only one being paid to provide care for your younger child, while you work, you will not be able to get the child care credit on your own tax return;

'1. How do parents determine if the minor "provided more than half his own support for the year";

You say that by the end of 2021 your child's income will be about $7000 in total.   Even if he had double that income for 2021----would that pay for his food, housing and clothes?   It certainly does not sound as if he is providing over half his own support.   He is spending his income on typical "kid stuff."

• What does "financially support another person" mean?

"2. Do parents need to withhold any taxes and issue a W-2?"

Do you want to consider your teenager to be a "Household Employee" ?   Or is he just your child to whom you are providing an allowance in exchange for helping in the household?

https://ttlc.intuit.com/community/tax-topics/help/who-is-considered-a-household-employee/00/26770

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.

https://www.irs.gov/taxtopics/tc756

"3. Should he file his own taxes? "       

You say he will receive a W-2 for the after school job.  If tax is withheld as shown in boxes 2 or 17 of the W-2 then he would want to file to seek a refund.

MY DEPENDENT HAD A JOB

If your dependent has a W-2 for his after-school job, summer job, etc. you do not include the information on your own return. You can still claim your child as a dependent on your own return.  He/she can file his own return to seek a  refund of some of his withheld wages (he won’t get back anything for Social Security or Medicare), but MUST indicate on it that he can be claimed as a dependent on someone else’s return.  (Supervise this closely or prepare it for him!)

If your dependent’s earnings were over $400 and were reported on a 1099Misc or 1099NEC then he must file a return and pay self-employment tax for Social Security and Medicare. 

WHO CAN I CLAIM AS A DEPENDENT?

You can claim a child, relative, friend, or fiancé (etc.) as a dependent on your 2020 taxes as long as they meet the following requirements:

Qualifying child

• They're related to you.
• They aren't claimed as a dependent by someone else.
• They're a U.S. citizen, resident alien, national, or a Canadian or Mexican resident.
• They aren’t filing a joint return with their spouse.
• They're under the age of 19 (or 24 for full-time students).
• No age limit for permanently and totally disabled children.
• They lived with you for more than half the year (exceptions apply).
• They didn't provide more than half of their own support for the year.

Qualifying relative

• They don't have to be related to you (despite the name).
• They aren't claimed as a dependent by someone else.
• They're a U.S. citizen, resident alien, national, or a Canadian or Mexican resident.
• They aren’t filing a joint return with their spouse.
• They lived with you the entire year (exceptions apply).
• They made less than $4,300 in 2020.
• You provided more than half of their financial support.

When you add someone as a dependent, we'll ask a series of questions to make sure you can claim them. There may be other tax benefits you can get when you claim a dependent.

Related Information:

• What does "financially support another person" mean?
• What is a "qualifying person" for Head of Household?
• Does a dependent for 2020 have to live with me?
• Do I qualify for Head of Household in 2020?
• Can I claim myself or my spouse as a dependent?

[xmasbaby0 · Accepted solution]

Almost overlooked this one

" If he opens a Roth IRA for 2021, would he be required to file his own taxes? "

The money that is put into a Roth must be earned income.   Is that really why you are asking about issuing a W-2 to your son?   So that he can put more into a Roth?  

[kretiv]

Hello,

Thank you so much for your response. I have bookmarked all of the IRS links. 

1. I cannot find this on the IRS link you quoted above:

"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."

Where can I find this information on the IRS site, please?

The minor is a full-time student in high school (has  not graduated yet) so neither job is his "regular occupation". He works for the parents for no more than 8 hours / week, 4 hours / day on the weekends, to watch his disabled brother while parents are out doing errands, etc. Occasionally, he may also watch his brother after school if either parent has a medical or other appointment  and the other parent needs help for any reason. But his services are mostly used on the weekends. 

2. The money that is put into a Roth must be earned income.   Is that really why you are asking about issuing a W-2 to your son?   So that he can put more into a Roth?  

Yes. The boy will likely receive a W-2 from the outside job and will contribute those earnings to a Roth IRA. However, since the agreement with the parents is informal (no "offer letter", payments made in cash at the end of each week etc), would it be necessary to issue a W-2 for the income he made for the entire year? 

In the future, what legal documentation should be in place to facilitate the boy's ability to contribute to a Roth IRA with his babysitting income? 

Thanks again!