Child's retirement account

[surpasspro]

I recently had a child and I was thinking about having them model for some stock photography images and pay them.  I read that you can open a custodial Roth IRA account for your child and can contribute the child's earned income to the retirement account.  Since I'm a sole proprietor I don't have to deduct payroll taxes and as long as they earned less than I believe $12,500K they don't have to file a tax return.  I may have to issue a 1099 though if I pay them more than $600.

Has anyone paid their children before and contributed to their retirement accounts?  If so what work did they do and any issues with the IRS?  I just want to make sure I do it the right way.  Thanks!

[ixtap]

How does your business use stock photos? The key is to make it a legitimate business expense, rather than make-work for the sake of moving money around. As long as that is the case, you shouldn't have any issues.

[secondcor521]

First, the IRS will have a problem if you excessively overpay your child.  For example, if I could pay the neighbor kid $20 to mow my lawn, I can't pay my own kid $500 for the same thing.

Second, it would need to be ordinary and reasonable to deduct as an income expense.  If you were a photography business and wanted to use your kids' baby pictures as marketing, that would make sense.  If you run an auto detailing shop and put the picture of your kid up in the customer lobby, not so much IMHO.

Third, yes, they can open a custodian Roth IRA and contribute to the amount of their earnings (up to the limit of $6K per year or whatever it happens to be).

Fourth, you're incorrect about the requirements to file a tax return.  They will be required to file a tax return if they have self employment earnings of $400 or more.  See the instructions for Form 1040, "Do You Have to File?", Chart C, item 3.

Fifth, they will pay both halves of self employment taxes via their Form 1040, Schedule C, and Schedule SE.  They'll likely get an adjustment for 1/2 of the SE taxes on Schedule 1 line 15.  There may be a partial exemption for this since it's your kid working in your business, but I forget those details.

Sixth, you will have to issue them a 1099-NEC if you pay them more than $600.

...

I had all three of my teenager kids open custodial Roth IRAs at Schwab.  They contributed based on things like house sitting, pet sitting, mowing lawns, and other similar typical teenager kid jobs.  The oldest is now graduated college and in the workforce and I think maxes out his contribution every year.  The middle contributes about half the time based on part time work he does while in college.  The youngest usually contributes all of their earnings (from part time work in on-campus jobs).

I usually do a thing at Christmas where I'll either match or gift to them based on their Roth contributions.  So if they contribute $500 I'll give them $500.  Of course, they still have to have earned income to make the contribution.  Last year I made those gifts in kind from my taxable account so that we, as a family, could defer the capital gains which would have otherwise been due.  This also means all three of my kids now have taxable accounts at Schwab.

[surpasspro]

How does your business use stock photos? The key is to make it a legitimate business expense, rather than make-work for the sake of moving money around. As long as that is the case, you shouldn't have any issues.

I'm a stock image photographer.  So I sometimes pay models for shoots so I can submit the images to stock sites for royalties. 

[surpasspro]

Fourth, you're incorrect about the requirements to file a tax return.  They will be required to file a tax return if they have self employment earnings of $400 or more.  See the instructions for Form 1040, "Do You Have to File?", Chart C, item 3.

Is that correct?  I quick google search says "Do Minors Have to File Taxes? Minors have to file taxes if their earned income is greater than $12,550 (increasing to $12,950 in 2022). If your child only has unearned income, the threshold is $1,100 (increasing to $1,150 in 2022)."

[secondcor521]

Fourth, you're incorrect about the requirements to file a tax return.  They will be required to file a tax return if they have self employment earnings of $400 or more.  See the instructions for Form 1040, "Do You Have to File?", Chart C, item 3.

Is that correct?  I quick google search says "Do Minors Have to File Taxes? Minors have to file taxes if their earned income is greater than $12,550 (increasing to $12,950 in 2022). If your child only has unearned income, the threshold is $1,100 (increasing to $1,150 in 2022)."

Yes, that is correct.  I pointed you to the IRS publication.  The IRS implements tax law, not random Google articles.

The random Google article's statement which you quoted is approximately right, but not exactly right.  It ignores some of the more unusual situations, such as the one you're contemplating.

Here's a more direct pointer:  Go to https://www.irs.gov/pub/irs-pdf/i1040gi.pdf and go to page 12 of that PDF.  Read the chart title, the first sentence in the chart, and item #3 in the chart.

[Dicey]

Jeremy over at Go Curry Cracker does this and has written several articles on the topic.

[Abe Froman]

...

Fourth, you're incorrect about the requirements to file a tax return.  They will be required to file a tax return if they have self employment earnings of $400 or more.  See the instructions for Form 1040, "Do You Have to File?", Chart C, item 3.

...

It depends on the work, but from what I understand - the sort of work you describe would require taxes paid after $400 revenue.

I dug deep for my situation - where my boys (well under 19) who cut a few lawns weekly - are considered household employees, which is defined as an employee if the homeowner controls not only what work is done, but how it’s done. This is typically the case of lawn / yard work and babysitting.

Details of the IRS household employee designation can be found here... https://www.irs.gov/publications/p926#en_US_publink100086722

Through this I was able to use my sons' record of lawn in their Google Sheets as evidence (should I need it in the future), and created 2 custodial Roths with Vanguard.

[secondcor521]

...

Fourth, you're incorrect about the requirements to file a tax return.  They will be required to file a tax return if they have self employment earnings of $400 or more.  See the instructions for Form 1040, "Do You Have to File?", Chart C, item 3.

...

It depends on the work, but from what I understand - the sort of work you describe would require taxes paid after $400 revenue.

I dug deep for my situation - where my boys (well under 19) who cut a few lawns weekly - are considered household employees, which is defined as an employee if the homeowner controls not only what work is done, but how it’s done. This is typically the case of lawn / yard work and babysitting.

Details of the IRS household employee designation can be found here... https://www.irs.gov/publications/p926#en_US_publink100086722

Through this I was able to use my sons' record of lawn in their Google Sheets as evidence (should I need it in the future), and created 2 custodial Roths with Vanguard.

Yup, I alluded to this exception in my first reply on this thread when I wrote "There may be a partial exemption for this since it's your kid working in your business, but I forget those details."