Creative (non-fraudulent) ways to document kids' earned income (for Roth)?

[AO]

I'm a new attending and just now reading up and understanding more and more about compound growth. I would love to be able to fund Roths for my kids (11 and 14 y/o) to allow them to build wealth. I'm employed, paid on W2, and my partner is a stay at home parent (without a business) so we don't have a way to employ them ourselves (I think). What are some creative ways to document income for them in order to be able to stash some $$ away while they are young? I'm not looking to cheat or engage in fraud, just looking to have them make income. I understand that even odd jobs can count as long as they keep a journal of the jobs and payments. I have explained to them both and they are excited to get ahead this way. We have promised to match any income they can document (they get to keep their earned dollars in their pockets while we fund the Roths). Any ideas other than the obvious lawn chores, house/animal/baby sitting?

[DMFA]

Is there a way to do it without paying FICA taxes on them? I mean, you could pay your kid $5,500 on a 1099, right, and it could entirely be deducted for withholding, while claiming them as a dependent on your own return and retaining the $4,000 exemption for you? But would you still be on the hook for both the employee and employer portions of SS/MCR (15.3%)?

[AO]

you're using a lot of words and acronyms I don't recognize. But I would think it would be difficult to generate a 1099 for them unless we had a business...

 

[ENT Doc]

Here are some thoughts:

http://cashcowcouple.com/investing/kids-rich-custodial-roth-ira/

 

Earned income can be from doing chores, but you can't pay them an absurd rate and need to document everything.  Contributions can be the lesser of earned income or $5,500.  You can even match it, as the above article says, if they don't want to put all their money into the Roth, but I think this deducts from what you have the capacity to give in gifting ($14,000 limit per child per year), which may affect 529 contributions.  Good luck!

[spiritrider]

I would caution taking legal advice from random websites (this one for that matter) unless you verify it from legitimate sources.

Most well respected tax experts do not believe you can hire your children for chores that you would not otherwise hire outside help. Evidence of the prior paying for those services would help.

These would be age appropriate tasks they might perform for other families in the neighborhood. Babysitting, lawn cutting, snow shoveling, etc...

Finally, you need to pay a Fair Marketn Value (FMV) wage and document, document, document.

Personally, I think you should look for such tasks for them in the neighborhood or even better real jobs. I really don't think there needs to be such a rush. With the tighter part-time job market, there should be increasing availability. Many states allow kids 14-15 to work limited hours and restrictive schedules. I saw a notice after New Year's Day on the local supermarket entrance. They were taking applications for those 15 for three hour week day shifts 3-6 and 6-9.

 

[jfoxcpacfp]

AO wrote:

I’m a new attending and just now reading up and understanding more and more about compound growth. I would love to be able to fund Roths for my kids (11 and 14 y/o) to allow them to build wealth. I’m employed, paid on W2, and my partner is a stay at home parent (without a business) so we don’t have a way to employ them ourselves (I think). What are some creative ways to document income for them in order to be able to stash some $$ away while they are young? I’m not looking to cheat or engage in fraud, just looking to have them make income. I understand that even odd jobs can count as long as they keep a journal of the jobs and payments. I have explained to them both and they are excited to get ahead this way. We have promised to match any income they can document (they get to keep their earned dollars in their pockets while we fund the Roths). Any ideas other than the obvious lawn chores, house/animal/baby sitting?

Click to expand...

You cannot "hire" your children for chores and consider what is essentially an allowance as earned income. Would you be willing to send them a 1099 for the work they are doing? Instant red flag.

[AO]

Definitely not planning to pay them for regular chores. Hoping to find them ways to make money (from other people) while they are still too young for "real" jobs. Not asking for legal advice, I'm married to a lawyer.

 

[jfoxcpacfp]

AO wrote:

Definitely not planning to pay them for regular chores. Hoping to find them ways to make money (from other people) while they are still too young for “real” jobs. Not asking for legal advice, I’m married to a lawyer.

 

Click to expand...

That's a lot easier, then! Just have the payors sign a receipt saying they paid $xx for X service(s) for the year 201x. Deposit the money in an account you set up in the child's name and file an income tax return for the child.

[VagabondMD]

I would not put myself in a position where there would be any possibility that, in the setting of an audit, I would have to defend myself for paying a kid to make his bed or clean her room.

I think that there are legitimate ways to transfer money to your children (like 529s, UTMAs, trusts, etc.) for future benefit to them, and when they get a real job, they can have a Roth IRA.

[Craigy]

jfoxcpacfp wrote:

AO wrote:

Definitely not planning to pay them for regular chores. Hoping to find them ways to make money (from other people) while they are still too young for “real” jobs. Not asking for legal advice, I’m married to a lawyer.

 

Click to expand…

That’s a lot easier, then! Just have the payors sign a receipt saying they paid $xx for X service(s) for the year 201x. Deposit the money in an account you set up in the child’s name and file an income tax return for the child.

Click to expand...

Are you required to file a return to make a Roth IRA contribution?

[Craigy]

spiritrider wrote:

 

Finally, you need to pay a Fair Marketn Value (FMV) wage and document, document, document.

ENT Doc wrote:

 

Earned income can be from doing chores, but you can’t pay them an absurd rate and need to document everything.

Click to expand...

Is there a documentation requirement for Roth IRA contribution?

[jfoxcpacfp]

Craigy wrote:

Is there a documentation requirement for Roth IRA contribution?

Click to expand...

No but I recommend doing so even if no tax is due (child works for parent's business). And, in the above situation (working for neighbors), the child will owe SE tax.