Author Topic: Should we get daughter an EIN?  (Read 1560 times)

RekkaBea

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Should we get daughter an EIN?
« on: November 20, 2021, 04:06:28 PM »
My 19yo daughter ended up being a content creator, making over 100k. Do we get her an EIN? What else should we do?
She'll recieve a 1099-NEC.

If, yes, should she be a sole proprietor or LLC or something else? She does not and probably will not have any employees.
« Last Edit: November 20, 2021, 05:07:24 PM by RekkaBea »

ixtap

  • Magnum Stache
  • ******
  • Posts: 3632
Re: Should we get daughter an EIN?
« Reply #1 on: November 21, 2021, 05:52:20 AM »
She should do it, not you. She will need an EIN if she wants to set up a solo 401k. Not much time left to do that this year, as it takes longer than most accounts.

RekkaBea

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Re: Should we get daughter an EIN?
« Reply #2 on: November 21, 2021, 08:11:48 AM »
Thank you ever so much!
We, meaning I was going to help her through the process.  She gets nervous when I try talking to her about money/taxes and finds any chance to walk away. She totally earned this money by accident...just trying to learn and have fun.

Small business stuff is all new to me, not the greatest person to help her, but I'm trying.


secondcor521

  • Magnum Stache
  • ******
  • Posts: 4489
  • Age: 52
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: Should we get daughter an EIN?
« Reply #3 on: November 21, 2021, 12:34:51 PM »
She can just report the income on a Schedule C under her own SSN.  The $100K will be on the income section.  She may be able to deduct business expenses, like internet or computer or recording equipment.  Subscription fees and software expenses as well.  Take a look at the various line items and see what is reasonable and necessary for her to earn this income.  Collect and save documentation to substantiate those business expenses.

As a result, she'll probably have to pay self-employment taxes on Schedule SE as well.  She should also get the adjustment to income (essentially a deduction) for 1/2 SE taxes on Schedule 1 around line 14.

She may qualify for the QBI deduction, so take a look at that.

Probably the biggest thing to do is to make sure she has money set aside to pay the SE taxes, federal income taxes, and state income taxes.  I'm not very good at estimating offhand, but 15.3% SE taxes plus at least 10% federal and maybe 5% state means it'd probably be smart for her to set aside 30% for taxes.  (I don't think it will be that much due to the standard deduction, and the SE adjustment and QBI, but it's better to be conservative I think.)

It'd probably be smart for her to fully fund a Roth IRA.

I don't recall all the details, but she might be able to deduct her health insurance costs as a self-employed person - see Schedule 1 around line 16.

If she's in college or will be in college, this income of hers will adversely impact her FAFSA aid two years from now.

You may need to revisit the question of whether or not she is your tax dependent, which could affect your tax return and your tax planning as well.

Paul der Krake

  • Walrus Stache
  • *******
  • Posts: 5719
  • Age: 14
  • Location: UTC-10:00
Re: Should we get daughter an EIN?
« Reply #4 on: November 21, 2021, 01:12:27 PM »
When was the income earned? Estimated quarterly taxes are not optional. She needs to get on the whole biz admin train fast. This isn't something you leave to the last minute.

Have her order a small business tax book or hire an accountant, yesterday.

secondcor521

  • Magnum Stache
  • ******
  • Posts: 4489
  • Age: 52
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: Should we get daughter an EIN?
« Reply #5 on: November 21, 2021, 02:04:22 PM »
When was the income earned? Estimated quarterly taxes are not optional.

Good point, generally true and something to consider.  Estimated payments are not required if OP's daughter falls under one of the safe harbors.  OP, there are four safe harbors that she may qualify for:

1.  Owe less than $1,000 at tax time (unlikely).
2.  Pay at least 90% of 2021 taxes either through withholding or estimated.
3.  Pay at least 100% (or 110% if high income - unlikely) of 2020 taxes either through withholding or estimated.
4.  Not having any tax liability in 2020 plus a few other conditions (possible).

@Paul der Krake's comments above are applicable to the first three items above.  It's unlikely for OP's daughter to meet items 1 through 3 without estimated, but she might fall under exception 4.

The above are federal rules.  States can have estimated tax payment rules that differ from the above.

The above are approximate descriptions - read up on estimated payments on the IRS website for the exact definitions and requirements.

RekkaBea

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Re: Should we get daughter an EIN?
« Reply #6 on: November 21, 2021, 05:14:14 PM »
Thanks so much, guys!

She received her first payment November(this month).
She is not in collage, she was a dependent last year. Probably not this year. She had a part time job last year and this year, about $6000.
She is under her Dad's insurance, still lives with parents but buys her own stuff.
She has nothing to deduct, a least nothing I would feel comfortable with.
She would like to fund some kind of retirement account to help lower taxes.

secondcor521  Do you feel there is a reason she should choose a Roth IRA over a Traditional IRA?
« Last Edit: November 21, 2021, 07:42:24 PM by RekkaBea »

SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1962
  • Age: 62
  • Location: Redmond, WA
    • Evergreen Small Business
Re: Should we get daughter an EIN?
« Reply #7 on: November 22, 2021, 06:59:58 AM »
secondcor521  Do you feel there is a reason she should choose a Roth IRA over a Traditional IRA?

I would think (guess) a Roth doesn't make sense if she's going to make $100k. That puts her in a pretty high tax bracket.

I'd think she uses a SEP-IRA to keep stuff simple. She needs and wants a good accounting system. Surely she has business expenses. The quarterly payments thing is mostly important so she doesn't, e.g., generate $100K of cash next year, spend $100K, and then fight the mother of all tax battles (which is getting surprised with a $25K tax bill in April '24).

BTW, one angle I'd look at is whether, if she's doing more schooling, whether or not she can write off educational expenses as business expenses. She can't deduct educational costs if the education prepares her for a new trade or profession... but she can deduct educational costs if they help her do her content creation job better.

This blog post is about hiring your minor kids (not relevant to your situation). But it also discusses write off educational costs when they support a person's trade or business (which is relevant).

https://evergreensmallbusiness.com/hiring-your-children-as-a-tax-loophole/

BTW, I sort of hate to bring this up... but maybe, maybe, she should consider (with input from a good tax advisor) operating as an S corporation. Congress is in process of closing that loophole, it looks like. But sounds like her income is at level where she might save $8K to $10K a year in SE taxes by operating as an S corporation. The process she'd take to do that? Probably form an LLC right now. For 2021, she'd treat the LLC as a sole proprietorship and report income and deductions on Schedule C. But then for 2022 and going forward, she'd elect to treat LLC as an S corporation. The rationale for this explained here: https://evergreensmallbusiness.com/million-dollar-s-corporation-mistake/

BTW, we give away free downloadable kits for forming an LLC at the blog.

A compulsive personality and impulsive paternal tendencies forces to me say that the business and accounting side of this could get too complicated if you're not careful.

RekkaBea

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Re: Should we get daughter an EIN?
« Reply #8 on: November 22, 2021, 09:10:40 AM »
Thanks SeattleCPA!
She really doesn't have business expenses.  She uses 25sqft of space in her parents home, on a computer she bought to play games with and the internet used by a household of 5. She doesn't have any plans for more education except what she learns on her own.

Oh, and this girl doesn't spend money...she easily lives on $300 per month, so I would never worry about her having enough money to pay her taxes.

I'll get her to download that LLC guide hopefully that will work out.  I haven't looked at it yet.
Hopefully opening an LLC doesn't take too long, the end of the year is coming quick...

secondcor521

  • Magnum Stache
  • ******
  • Posts: 4489
  • Age: 52
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: Should we get daughter an EIN?
« Reply #9 on: November 22, 2021, 10:35:58 AM »
secondcor521  Do you feel there is a reason she should choose a Roth IRA over a Traditional IRA?

Others have given good responses, but since you asked me I'll give you my thoughts.

I'd say as long as she's saving towards retirement and doing it in a tax-efficient manner, that puts her well ahead of nearly all her peers and she'll do well regardless.  So Roth, traditional, SEP, whatever are all good choices.

Over the years of our kids' lives, they'll be in various tax brackets.  Broadly speaking, as I see it, if you have to pay taxes, you want to spread them evenly over long periods of time to stay out of the higher brackets.

So there are two basic leveling strategies:  defer and accelerate.  Deferring means avoiding taxes now, paying them later when you hope to be in a lower bracket.  Accelerate means paying taxes now, avoiding paying them later when you guess you'll be in a higher bracket.

I tend to frame this in my mind as there is some income tax rate that I should be happy to pay (because it's lower than what I think I'll be paying in the future), but avoid anything higher (because that would be higher than what I'll be paying in the future).

It takes making guesses about what income taxes will do in the future and what one's income sources will look like in the future.  Each person has to do this for themselves, but if you sit down and noodle on it and scratch out a bunch of tax returns, and do some Excel modeling, you can get a good guess.

My guess was that your daughter, if she is already making that kind of income at a young age, will probably be a high earner in the rest of her life.  So this year might be a low income year for her.  So she'd want to choose the "accelerate" option and pay taxes now.  A Roth is post tax, so she'd be paying the taxes on her contribution.

But maybe my guess was wrong.

If you think this high income early is an anomaly, and she'll have some low income years in her future (either college, time off for travel/sabbatical, a low-income career, or FIRE could create those low income years), then she'd want to choose the "defer" option.  Contribute to a traditional IRA, avoid the taxes now, then do a Roth conversion in those low income years to pay the taxes then.

That's my thought process.

RekkaBea

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Re: Should we get daughter an EIN?
« Reply #10 on: November 23, 2021, 06:48:35 AM »
secondcor521 Definitely something to consider there.  I wasn't thinking about what her income might be 10-15 years from now. I'll have to see what she thinks she'll want to be doing around then.

 I don't want her to put so much of her money in retirement accounts that she'll have millions then but not enough if she chooses to FIRE.

secondcor521

  • Magnum Stache
  • ******
  • Posts: 4489
  • Age: 52
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: Should we get daughter an EIN?
« Reply #11 on: November 23, 2021, 10:21:34 AM »
secondcor521 Definitely something to consider there.  I wasn't thinking about what her income might be 10-15 years from now. I'll have to see what she thinks she'll want to be doing around then.

 I don't want her to put so much of her money in retirement accounts that she'll have millions then but not enough if she chooses to FIRE.

If she chooses to FIRE, there are several ways to get access to retirement funds early.  Personally I'm doing the Roth conversion ladder, but there's also SEPPs, the Rule of 55, just paying the 10% penalty, and perhaps others.  Google is your friend ;-)