Paperwork for kid Roth IRA income

[forummm]

I want to teach my kids lessons of working, saving, investing, tax efficiency, etc. The idea is to hire them to do age-appropriate tasks our the home, and put that income in a Roth IRA. My research says children employed solely by their parents for non-hazardous tasks is exempt from child labor laws. And I see that this employment is exempt from Social Security and Medicare tax (FICA) and FUTA.

Schedule H (Household Employment Taxes) makes it clear in the first section I don't even need to file Schedule H if my only payments were to my children and I didn't withhold any taxes.

Further, since I would only pay them up to the $7,000 IRA contribution limit, they would not need to file a tax return since they are under the income threshold.

They would need to file if they had $400 in self-employment income. But if I hire them as employees, this wouldn't apply.

From the Schedule H instructions, it seems like I don't need to file W-2s for them since the income is not subject to Social Security or Medicare tax, and there was no tax withholding.

You must file Form W-2 for each household employee to whom you paid $2,700 or more of cash wages in 2024 that are subject to social security and Medicare taxes. To find out if the wages are subject to these taxes, see the instructions for Schedule H, line 1, line 3, and line 5, later. Even if the wages aren't subject to these taxes, if you withheld federal income tax from the wages of any household employee, you must file Form W-2 for that employee.

The W-2 instructions say I would need to file if I made payments to them in service of my trade or business. But this is for household activities, and not a business.

You must file Form(s) W-2 if you have one or more employees to whom you made payments (including noncash payments) for the employees’ services in your trade or business during 2024.

Any opinions on if a W-2 is necessary?

I am *not* looking to get a tax deduction for employing them. I see a number of articles about how this is a smart idea. But I don't have business income to deduct anyway. My income is from investments.

Is there any paperwork that I need to file with the IRS to report the income?

[seattlecyclone]

Your research about your own filing requirements as the employer (or lack thereof) is likely as good as mine. Does the kid have any investment income outside a Roth IRA? If this amount is over $450 they might need to file a tax return.

[forummm]

They would have no other income besides what I would pay them.

[Sugaree]

My state has more strict child labor laws than the federal law, so you could possibly run into issues there.  I would be very careful about paying them for tasks around the house, because those could likely be considered chores and those aren't eligible as earned income for Roth IRA purposes.  It might be worth talking to a tax attorney to make sure that what you're asking them to do for the money counts and what records need to be kept.

[terran]

I wouldn't do this unless you're hiring them for legitimate work in a business, not for household chores. Here's an article that basically says the same thing: https://www.kiplinger.com/taxes/hiring-your-kids-tax-benefits-and-rules

[forummm]

I wouldn't do this unless you're hiring them for legitimate work in a business, not for household chores. Here's an article that basically says the same thing: https://www.kiplinger.com/taxes/hiring-your-kids-tax-benefits-and-rules

There are a lot of those kind of articles, but they refer to taking a deduction for your business for the labor. There's an obvious tax dodge to pretend your kids are employees, deduct their salaries, but have the kids pay no tax on their income since they're below the filing limits. I'm not looking to take a deduction or dodge any tax.

The Schedule H instructions make it explicit that you can hire your kids and pay them as household employees without having to pay employer tax to do that. And I don't see any restrictions on what you can pay them for, as long as you aren't deducting it from your own income.

[forummm]

My state has more strict child labor laws than the federal law, so you could possibly run into issues there.  I would be very careful about paying them for tasks around the house, because those could likely be considered chores and those aren't eligible as earned income for Roth IRA purposes.  It might be worth talking to a tax attorney to make sure that what you're asking them to do for the money counts and what records need to be kept.

Can you point me to where chore aren't eligible as earned income for Roth IRA purposes?

All I can find in Pub 590 is that compensation is defined broadly.

I would be fine with them being self-employed and paying SE tax, but it seems like that's also unnecessary.

[forummm]

At the 3 minute mark this CPA says you don't have to issue your kids a 1099 or a W-2 (because no SUTA, FUTA, FICA), even for a regular business where you're taking a business expense deduction. The business expenses it as "outside labor". This sounds consistent with what I was reading from the IRS instructions. It seems reasonable that this applies to me, even though I'm not taking a business expense deduction for the income the kids would receive.

[Sugaree]

My state has more strict child labor laws than the federal law, so you could possibly run into issues there.  I would be very careful about paying them for tasks around the house, because those could likely be considered chores and those aren't eligible as earned income for Roth IRA purposes.  It might be worth talking to a tax attorney to make sure that what you're asking them to do for the money counts and what records need to be kept.

Can you point me to where chore aren't eligible as earned income for Roth IRA purposes?

All I can find in Pub 590 is that compensation is defined broadly.

I would be fine with them being self-employed and paying SE tax, but it seems like that's also unnecessary.

https://www.courtlistener.com/opinion/4558819/alexander-v-commr/

[forummm]

My state has more strict child labor laws than the federal law, so you could possibly run into issues there.  I would be very careful about paying them for tasks around the house, because those could likely be considered chores and those aren't eligible as earned income for Roth IRA purposes.  It might be worth talking to a tax attorney to make sure that what you're asking them to do for the money counts and what records need to be kept.

Can you point me to where chore aren't eligible as earned income for Roth IRA purposes?

All I can find in Pub 590 is that compensation is defined broadly.

I would be fine with them being self-employed and paying SE tax, but it seems like that's also unnecessary.

https://www.courtlistener.com/opinion/4558819/alexander-v-commr/

Thanks for the interesting read. However, it appears that the IRS was objecting to the parents taking business deductions for the wages paid for household chores. This is the tax dodge I mentioned in a prior post. Since I'm not taking business deductions, I don't know if much in that case applies to my situation. Do you disagree?

I see the points about keeping records being useful.

[MoseyingAlong]

Thanks for the interesting read. However, it appears that the IRS was objecting to the parents taking business deductions for the wages paid for household chores. This is the tax dodge I mentioned in a prior post. Since I'm not taking business deductions, I don't know if much in that case applies to my situation. Do you disagree?

I see the points about keeping records being useful.

Maybe consider why you want to put the money in a Roth IRA for your kids instead of a normal investment account.
It's a long-term tax dodge. You're trying to set your kids up with tax-free growth instead of having to pay the taxes on interest, dividends and capital gains if the investment was in a regular account.

If these chores are something you're going to make your kids do, whether or not the Roth idea works out, I think you would clearly be evading taxes (yes, on their behalf, not your own).

If these chores are something you would pay someone else to do, I think you have a case. But to my mind, the kids have to have some say in whether they do them or not.

[forummm]

Thanks for the interesting read. However, it appears that the IRS was objecting to the parents taking business deductions for the wages paid for household chores. This is the tax dodge I mentioned in a prior post. Since I'm not taking business deductions, I don't know if much in that case applies to my situation. Do you disagree?

I see the points about keeping records being useful.

Maybe consider why you want to put the money in a Roth IRA for your kids instead of a normal investment account.
It's a long-term tax dodge. You're trying to set your kids up with tax-free growth instead of having to pay the taxes on interest, dividends and capital gains if the investment was in a regular account.

If these chores are something you're going to make your kids do, whether or not the Roth idea works out, I think you would clearly be evading taxes (yes, on their behalf, not your own).

If these chores are something you would pay someone else to do, I think you have a case. But to my mind, the kids have to have some say in whether they do them or not.

I wouldn't pay someone else to do them because I don't like having other people in my house. But I also wouldn't make my kids do them at this point without compensation. We've started talking about working and saving and tax advantage being helpful for long term growth due to it being an exponential function, etc. And the idea of setting aside money for retirement in a special retirement account that you never touch. So it's all part of the lessons I'm trying to teach them. Lessons that have been so valuable to me.

I'm happy to pay the SE tax (FICA) if that's what's due (you are allowed to gift tax payments)--although the IRS says kids paid by their parents are exempt from FICA. I'm simply asking what paperwork is required, and I'll follow all the rules. There is no dodge. It's a provision of the tax code that everyone is allowed to use up to the annual limit. If the IRS said kids can't have IRAs I would follow that rule. But so far I don't see anything saying it's not legal. I'm simply asking what paperwork to fill out, and what tax (if any) should be paid.

I'd even be willing to pay a reasonable fee to a knowledgeable tax consultant who can answer my questions with an informed knowlege base and point to the guidance. I don't happen to know anyone, but would take a referral.

[Sugaree]

My state has more strict child labor laws than the federal law, so you could possibly run into issues there.  I would be very careful about paying them for tasks around the house, because those could likely be considered chores and those aren't eligible as earned income for Roth IRA purposes.  It might be worth talking to a tax attorney to make sure that what you're asking them to do for the money counts and what records need to be kept.

Can you point me to where chore aren't eligible as earned income for Roth IRA purposes?

All I can find in Pub 590 is that compensation is defined broadly.

I would be fine with them being self-employed and paying SE tax, but it seems like that's also unnecessary.

https://www.courtlistener.com/opinion/4558819/alexander-v-commr/

Thanks for the interesting read. However, it appears that the IRS was objecting to the parents taking business deductions for the wages paid for household chores. This is the tax dodge I mentioned in a prior post. Since I'm not taking business deductions, I don't know if much in that case applies to my situation. Do you disagree?

I see the points about keeping records being useful.

The key takeaway for me is that if it's not something that's deductible for a business, it's unlikely to qualify as earned income for Roth purposes either. 

[forummm]

The key takeaway for me is that if it's not something that's deductible for a business, it's unlikely to qualify as earned income for Roth purposes either.

I think those are two separate things.

It's not a legitimate business expense for your business to pay for your personal expenses that are not part of running the business. If you're an engineer you can't deduct the cost of having your house painted.

But any income you have from employment is eligible for an IRA contribution. The painter has income for painting the engineer's house, even though it's not a deductible business expense for the engineer.

Even tips or being paid to watch the paint dry (if someone was odd enough to pay you to do that) is income.

The IRS, in multiple places, addresses paying family members for domestic work, and uses the word "employed" in that context.

[secondcor521]

AARP Foundation Tax Aide certified tax preparer on my sixth season.

I think it's fine.  Keep records of what you paid (date, kid, amount, chore/task).  I forget what all the limits are, but you've obviously already researched them.  You can memorialize the income by filing a tax return even if it's not required if you want to; I personally wouldn't bother.

I think the main thing is to pay reasonable rates.  Don't pay an 8 year old $500 to empty the bathroom trash can.

The bigger value really is educating the kids on work, taxes, saving, investing, etc. which it sounds like you're doing in parallel with the actual Roth IRA contributions.

Schwab was very friendly to us when opening custodial Roth IRAs for my kids, FWIW.

[MustacheAndaHalf]

I wouldn't pay someone else to do them because I don't like having other people in my house. But I also wouldn't make my kids do them at this point without compensation.

The IRS, in multiple places, addresses paying family members for domestic work, and uses the word "employed" in that context.

Combining "domestic work in the parent's home" with that link, it looks like you need to do "income tax withholding".  You might look into how often, and what percentage, needs to be sent to the IRS.  If they're old enough, maybe paying the IRS is part of the lesson.

"Children employed by parents
Payments for domestic work in the parent’s private home:

Are not subject to income tax withholding unless the payments are for domestic work in the parent's home."

[Scandium]

Payments for domestic work in the parent’s private home:

Are not subject to income tax withholding unless the payments are for domestic work in the parent's home."

What the hell is the IRS trying to say here? Domestic work is not subject to tax, unless it's domestic work?!

I'm very interested in this research, since I did some digging myself (much less than OP). In the end I didn't do it, figuring the IRS wouldn't think "kids cleaning their room" was "income" for IRA purposes. But that was more based on vibes than anything concrete I found. Surprised this isn't specifically clarified anywhere. I would think it would be fairly common question.

My kid started walking the neighbors dog for few bucks per week which I put into a Roth. And another neighbor paid him for snow shoveling. It doesn't add up to much, but hopefully we can ramp it up. I keep a spreadsheet with date/amount/person for each payment. But unless it's >$400/year he don't have to file a return or pay any tax.

Now of course, how many just stick $7k into a roth for their kid and hope for the best? Would the IRS audit a 6 year old with no income who don't file anything..?

[MustacheAndaHalf]

I'm not qualified to guess the intent of the IRS, but IRA contributions will reach them.

IRA contributions will be reported on Form 5498:

IRA contribution information is reported for each person for whom any IRA was maintained, including SEP or SIMPLE IRAs.
An IRA includes all investments under one IRA plan.
The institution maintaining the IRA files this form.

https://www.irs.gov/retirement-plans/reporting-ira-and-retirement-plan-transactions

[forummm]

Combining "domestic work in the parent's home" with that link, it looks like you need to do "income tax withholding".  You might look into how often, and what percentage, needs to be sent to the IRS.  If they're old enough, maybe paying the IRS is part of the lesson.

Yes, but if no tax is due, then none needs to be withheld. Paying the IRS what is due is a good lesson. But another good lesson is to be strategic about expenses (including taxes) and not pay unnecessary things.

[forummm]

I'm not qualified to guess the intent of the IRS, but IRA contributions will reach them.

IRA contributions will be reported on Form 5498:

IRA contribution information is reported for each person for whom any IRA was maintained, including SEP or SIMPLE IRAs.
An IRA includes all investments under one IRA plan.
The institution maintaining the IRA files this form.

https://www.irs.gov/retirement-plans/reporting-ira-and-retirement-plan-transactions

That's for employers reporting SEP and SIMPLE IRA contributions. But I'm sure Vanguard reports contributions made via individuals to their own accounts as well. The IRS would want to make sure only the annual maximum was contributed across any number of institutions (so you couldn't put $7k into Vanguard and another $7k into Fidelity, etc).

[forummm]

Now of course, how many just stick $7k into a roth for their kid and hope for the best? Would the IRS audit a 6 year old with no income who don't file anything..?

At this point, I haven't seen anything to make me think that I need to file anything at all. I could file a W-2, but the CPA in the video said it was unnecessary and would confuse the IRS. So I might go with the contribute, file nothing, and see what happens route. If they penalize me a couple hundred bucks for untimely W-2 filing, then I'll know. In the event of an audit, I have all my research saved and noted, and will keep daily tracking of their work hours. They can't reasonably accuse me of any intentional noncompliance. And with the amount of tax I pay each year, I'm clearly not trying to pull a fast one over some peanuts. I don't even take all the deductions I'm legally entitled to.