Announcement

Collapse
No announcement yet.

Are your kids' chores earned income?

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Are your kids' chores earned income?

    Very interesting Q&A in Ed Slott's mailbag this month on a topic we've discussed on this forum recently. I must admit I had not wrapped my mind around the disastrous results until I read this commentary. Even though tp is beyond the SOL, since the Roth was never an IRA, SOL doesn't matter and the penalties toll on. (SOL = Statute of Limitation)

    >>I opened a Roth IRA for my son and reported the contribution on a W-2. This was not a business, but was a payment for actual chores that he did for me. I did this for three years - 2009 through 2011. We feel the work was legitimate and actually marked the dates and times on a calendar.

    I now read that this is not wages and should not be done. It is hard for me to understand why, but what should I tell him to do with the account as he is now 19. I don’t want him to be in trouble with IRS later?

    Answer:
    While there are certainly scenarios where a parent can pay a child, either as an employee or as an independent contractor, for services performed, taking care of household chores is not one of those situations. There is longstanding history of this, with cases going back into the 1960s treating payments for chores and the like as part of “parental training and discipline.” Thus, in your particular situation, your son had no real income from which to make Roth IRA contributions for 2009-2011. As a result, the amounts contributed are all “excess contributions,” subject to a 6% penalty for each year they remain in the account without being corrected. If your son has never had “real” earnings, these contributions still represent excess amounts and must be distributed to avoid further penalties. For each year there is a penalty to report – which could be 2009-2015 - he’ll need to file Form 5329 to report the excess contribution penalty. This is not something the IRS has the authority to waive, and if nothing is done to correct the issue, the problem will only get worse in future years.<<
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

  • #2
    Yikes. Painful.

    Was trying to think of legitimate jobs for my soon to be 10 year old. Neighbor and I were joking about having each other's kids do chores like walkway shoveling, weeding, babysitting, etc and paying each other to document and contribute to kids Roths.

    Too sketchy? Legit?

    Comment


    • #3
      A child doesn't do chores for a neighbor. He/she is hired to perform work. That is the difference so your idea comes closer to passing the sniff test. Just don't trade your little slaves back and forth - hire each other's kids. And quit using the word chores lol.
      Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

      Comment


      • #4
        Ah, even better idea.  Oldest child will make lemonade and hire youngest child to run sidewalk lemonade stand.  Parents in neighborhood will buy lemonade at a generous price. Earned income will be given to Uncle Roth.  

        Comment


        • #5




          Ah, even better idea.  Oldest child will make lemonade and hire youngest child to run sidewalk lemonade stand.  Parents in neighborhood will buy lemonade at a generous price. Earned income will be given to Uncle Roth.  ?
          Click to expand...


          Of course - there are all kinds of possibilities for young entrepreneurs. Encourage the kids to think outside the box - they are not limited by adult boundaries. The problem is that, these days, there are not enough parents to serve as role models. Too many feel the need to protect their children from the world - which they eventually face, unprepared. Sad. (Now I sound very, very old.) This forum serves an incubator in that sense and I find that both encouraging and inspiring.
          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

          Comment


          • #6
            Great resource yet again, thanks Johanna! Can we float some more ideas in and out of the box that we can borrow from? Mine are still rather little.. but we have been so late in the game that I want to make sure they have a headstart.

            Comment


            • #7




              Great resource yet again, thanks Johanna! Can we float some more ideas in and out of the box that we can borrow from? Mine are still rather little.. but we have been so late in the game that I want to make sure they have a headstart.
              Click to expand...


              Sure, why not?
              Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

              Comment


              • #8
                I understand the concern with "hiring/paying" your children for chores - or the neighbors kids. But in all due respect, what are you concerned about? The MOST the IRS could do is audit your child's tax return and disallow the contribution.  Big deal! Your child made $6000 in earned income and the IRS comes after him/her for what? To repay a few hundred dollars in taxes and disqualify the contribution? I completely understand how our government misappropriates funds, but even I believe they have bigger fish to fry then our children's Roth IRA's. For what it's worth, I have been contributing to my children's Roth's  for four years now (they are currently 10 and 12). If I'm right and the government doesn't audit their returns, they will have a substantial account in their later years.

                Comment


                • #9




                  I understand the concern with “hiring/paying” your children for chores – or the neighbors kids. But in all due respect, what are you concerned about? The MOST the IRS could do is audit your child’s tax return and disallow the contribution.  Big deal! Your child made $6000 in earned income and the IRS comes after him/her for what? To repay a few hundred dollars in taxes and disqualify the contribution? I completely understand how our government misappropriates funds, but even I believe they have bigger fish to fry then our children’s Roth IRA’s. For what it’s worth, I have been contributing to my children’s Roth’s  for four years now (they are currently 10 and 12). If I’m right and the government doesn’t audit their returns, they will have a substantial account in their later years.
                  Click to expand...


                  So you're playing audit lottery? Contributing the max based upon chores? That gets a big yikes. Seriously - a 6 y.o. getting pd $5,500/yr? For what? Unless they are child actors/models, where is the value?

                  That is not the MOST the IRS could do, fwiw. If you lose your gamble and your kids' returns are audited and/or the Roth contributions are disqualified based upon a scheme you cooked up, guess who would be next?
                  Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                  Comment


                  • #10
                    I think all parents would agree that our kids are wonderful actors, and no doubt, every grandparent would absolutely pay their grandkids as "entertainers". Or , as TheGipper said, have them run a lemonade stand...have them walk the neighbors dog...shovel the snow...sweep the garage...etc.

                    Would I be uncomfortable putting a six month old on my home payroll - yes (but I know many people who have) -  but a six year old? They're capable of doing real things - take them to work and have them clean your office. Put their picture on the wall and then there is at least a talking justification for them being "models" that you talk to your patients about. By no means I am saying this strategy is right for everyone...but if you are willing to take the "risk", and know what your talking justification would be in the event of an audit, then each parent needs to determine if it is within their personal risk tolerance to set their children up for the possibility of financial independence.

                    As an aside, I think it would be great if the website could post a survey on the number of individuals who have actually been audited.

                    Comment


                    • #11


                      Would I be uncomfortable putting a six month old on my home payroll – yes (but I know many people who have) –  but a six year old? They’re capable of doing real things – take them to work and have them clean your office. Put their picture on the wall and then there is at least a talking justification for them being “models” that you talk to your patients about. By no means I am saying this strategy is right for everyone…but if you are willing to take the “risk”, and know what your talking justification would be in the event of an audit, then each parent needs to determine if it is within their personal risk tolerance to set their children up for the possibility of financial independence.
                      Click to expand...


                      As I stated earlier, there are many things young children can do to earn money. I have yet to see a 6 yo - or even a 10 yo - with the stamina and maturity to earn $100+/wk, or deserve a $100+/wk allowance. Besides, our policy is to never work with clients who cheat. I realize, however, there are many who are willing to play audit lottery and do so successfully.

                      A survey of individuals who have been audited might be interesting, but as far as representative, absolutely not. We have 890 in the directory, possibly a couple of hundred of those who post. Thousands of lurkers who prefer to remain that way.

                      I find it hard to believe that you "know many people who have" put their six month-olds on payroll. A dependent's age is a matter of record and some would be caught in the IRS net. There would be some headlines somewhere - that would be too good a story to pass up.
                      Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                      Comment

                      Working...
                      X