Roth IRA for Child Model

[SteffanW]

Hello,

I have a soon to be 2 year old son. His grandparents wish to pay him $500 this year for baby modeling for their business and I want to make sure I fill out all tax related forms correctly.
I read this CrispyDoc link breaking it down: https://www.crispydoc.com/2018/07/02...dren-to-model/

I apologize in advance for the rudimentary questions but I really have no idea what I'm doing with this:

1) Do the grandparents send the completed W-4 and I-9 to the IRS? How do I know were to send the form?
2) If they payment is to be made before the end of the year (in 2020) which years W-4 from am I supposed to fill out? 2020 or 2021?
3) Is this the correct I-9 form? https://www.uscis.gov/sites/default/...er-version.pdf
4) How do I go about filing a W-2 and W-3? I'm guessing the Grandparents have to file this somehow as the employer.

Any other tips would be appreciated if you think it might make the process easier.

[billy]

I dont have any answers to your questions, but just wondering, if grandparents want to pay your child to model, why the rush to do it this year? I feel like especially since you will be doing a roth for a 2 year old, waiting a month (and tax year) to make sure you do it correctly would be prudent, and wouldnt really affect the outcome much if delayed. There are only 4 business non federal holiday days left to get all your paperwork filed, and government workers tend to relax around this time.

Is 500$ the going rate for a child model? Make sure they are paying a normal rate, not a "its my grandson" rate.

[jfoxcpacfp]

Since the grandparents have a business, I bet they have a CPA/EA/tax preparer. This is something the grandparent’s guy or gal needs to provide guidance on b/c the CPA w/b filing the forms and asking you for the info for the appropriate reporting. Your requirements are limited to the information the CPA requests and then filing according to the forms that are provided by the business.

Hope you’re thinking $500 Baby-Roth, 2yo is an incredible start date!

[MPMD]

i would file this firmly under the heading of not enough money to be worth the hassle and let the grandparents snap some pics of the kid for free.
or have them just make a gift to a 529 if they feel the need to compensate you.
it's kind of like when people have a side gig where they intermittently make $8k/year and they are wondering about starting a solo 401k, it's quite a bit of paperwork and some mild but real exposure to issues with IRS if you mess it up for such a small amount of money.

[SteffanW]

i would file this firmly under the heading of not enough money to be worth the hassle and let the grandparents snap some pics of the kid for free. or have them just make a gift to a 529 if they feel the need to compensate you.
it's kind of like when people have a side gig where they intermittently make $8k/year and they are wondering about starting a solo 401k, it's quite a bit of paperwork and some mild but real exposure to issues with IRS if you mess it up for such a small amount of money.

That filing firmly shows a failure to understand the value of a Roth IRA for a minor at such a young age. The income for a minor making $500 is not taxed. When placed in a Roth IRA it never will be taxed. If the grandparents gift a 529 they fail to get the tax benefits from an employee expense. Additionally, the money won't compound for as long. The grandparents wanted to provide a gift with more value and they figured the 529 will already be taken care of (It will be.).

$500/year for 15 years at a 7% rate of return allowed to grow until age 65 would be worth $370,107.19 tax free. Accounting for inflation (5% Real rate of return) that would be $123,723.04 in today's dollars.

I'm betting you do consider $123,723.04 tax free in today's dollars to be significant, worth the time, and worth the minor IRS risks.

All that said, I'm the one hoping for a lesson here, on how these tax forms should be completed....

[SteffanW]

I dont have any answers to your questions, but just wondering, if grandparents want to pay your child to model, why the rush to do it this year? I feel like especially since you will be doing a roth for a 2 year old, waiting a month (and tax year) to make sure you do it correctly would be prudent, and wouldnt really affect the outcome much if delayed. There are only 4 business non federal holiday days left to get all your paperwork filed, and government workers tend to relax around this time.

Is 500$ the going rate for a child model? Make sure they are paying a normal rate, not a "its my grandson" rate.

Good point about the time frame. Since we aren't maxing out the Roth it would seem fine to complete this in January. The going rate is $100/hr. He would need to keep a time sheet to show hours worked.

[MPMD]

That filing firmly shows a failure to understand the value of a Roth IRA for a minor at such a young age. The income for a minor making $500 is not taxed. When placed in a Roth IRA it never will be taxed. If the grandparents gift a 529 they pay taxes on that money. Additionally, the money won't compound for as long. The grandparents wanted to provide a gift with more value and they figured the 529 will already be taken care of (It will be.).

$500/year for 15 years at a 7% rate of return allowed to grow until age 65 would be worth $370,107.19 tax free. Accounting for inflation (5% Real rate of return) that would be $123,723.04 in today's dollars.

I'm betting you do consider $123,723.04 tax free in today's dollars to be significant, worth the time, and worth the minor IRS risks.

All that said, I'm the one hoping for a lesson here, on how these tax forms should be completed....

grandparents do not pay any taxes on $500/year contributed to a 529. you're right that the horizon isn't as long but money is fungible and educations have to be paid for.

if you are talking about $500/year for 15 years then it might be worth the trouble. although respectfully if you are looking at a baby and know said baby will be commanding $250/hr to model as a 15 year old then i think you are playing a little fast and loose with the concept of fair market value for the "work." That fact would lead me to be more, not less, careful. what type of business do the grandparents have where $500/year budget for childhood modeling is reasonable and where their need for child models changes exactly as your kid grows? they need an infant now and they will need a school aged child in 8 years at a similar rate? i would be very nervous about trying to defend this under audit. i have no experience with auditing but would ask what other modeling work the kid had done from ages 0-15. my rule of thumb for the IRS is that if it sounds too good to be true it is and this sounds like that to me.

i know WCI uses his kids as models and i'm sure he's thought about this a ton. my guess is that given the size and scope of WCI it would be much easier to justify than a little side hustle doing this. i'd still expect at least a raised eyebrow from an auditor but i would imagine he'd be able to talk his way out of it. i certainly think the FMV factor here is kind of silly since there is clearly no market at work. it's not like there was a casting call.

good luck whatever you decide.

[TheDangerZone]

Alternatively you could just set up a UTMA account and have the grandparents contribute. A lot less messy, a lot less paperwork and the recipient still gets favorable tax treatment if you play your cards right.

123k in today’s dollars is less than 2k a year when your 2yo turns 65. Sure, it’s not chump change but let’s hope you leave behind much more than that. And if they need to touch it much sooner than that, It will be even less. If they don’t need to touch it (and tax laws stay the same for the next 80(!!) plus years) then you’re talking about extra Roth money your grandkids might someday get. Juice is not worth the squeeze IMO in this context (family employer stretching to try and pay a grandchild with no idea how it’s supposed to work).

[G]

Business expense for never again taxed money. Lessons associated with a JOB (when older) and discussing RIRA with a teen/young adult. I'm dubious about 500/yr every year for modeling, but perhaps in the future a few dollars for shredding paper or sorting mail. OP, I'm picking up what you're laying down.

There is a good chance that the tax savings will be obliterated by the CPA expense...but knowing the process could be worth the cost. Let us know what business CPA says.

[SteffanW]

grandparents do not pay any taxes on $500/year contributed to a 529. you're right that the horizon isn't as long but money is fungible and educations have to be paid for.

if you are talking about $500/year for 15 years then it might be worth the trouble. although respectfully if you are looking at a baby and know said baby will be commanding $250/hr to model as a 15 year old then i think you are playing a little fast and loose with the concept of fair market value for the "work." That fact would lead me to be more, not less, careful. what type of business do the grandparents have where $500/year budget for childhood modeling is reasonable and where their need for child models changes exactly as your kid grows? they need an infant now and they will need a school aged child in 8 years at a similar rate? i would be very nervous about trying to defend this under audit. i have no experience with auditing but would ask what other modeling work the kid had done from ages 0-15. my rule of thumb for the IRS is that if it sounds too good to be true it is and this sounds like that to me.

i know WCI uses his kids as models and i'm sure he's thought about this a ton. my guess is that given the size and scope of WCI it would be much easier to justify than a little side hustle doing this. i'd still expect at least a raised eyebrow from an auditor but i would imagine he'd be able to talk his way out of it. i certainly think the FMV factor here is kind of silly since there is clearly no market at work. it's not like there was a casting call.

good luck whatever you decide.

The business sells jewelry online. The photos on the website can change over time as my child ages and the child should be able to receive a modeling fee. I have my own business but can't justify my psychiatry business paying a baby. The work is legit (Making the assumption that a baby can't model jewelry is a poor assumption. I've certainly seen some interesting wedding photos involving baby feet and rings.). All of the right paper work will be in place. The IRS isn't going to think twice about $500 for modeling work aside from sending me a form to inquire what the line of work is. The business probably makes around $500K per year or so, plenty enough to justify $500/yr for a website model. FMV is determine by doing a google search online and comes to around $100/hr.

Other WCI articles on child modeling:
Starting at [00:28:05]: https://www.whitecoatinvestor.com/an...nd-podcast-51/
See #4: https://www.whitecoatinvestor.com/my...s-inheritance/
https://www.whitecoatinvestor.com/ho...-will-survive/

[SteffanW]

Business expense for never again taxed money. Lessons associated with a JOB (when older) and discussing RIRA with a teen/young adult. I'm dubious about 500/yr every year for modeling, but perhaps in the future a few dollars for shredding paper or sorting mail. OP, I'm picking up what you're laying down.

There is a good chance that the tax savings will be obliterated by the CPA expense...but knowing the process could be worth the cost. Let us know what business CPA says.

I also had the CPA concern. I'm inquiring about this to see what we can work out. I wonder if I'm capable of filing his taxes on my own. They should be really simple.

[MPMD]

The business sells jewelry online. The photos on the website can change over time as my child ages and the child should be able to receive a modeling fee. I have my own business but can't justify my psychiatry business paying a baby. The work is legit (Making the assumption that a baby can't model jewelry is a poor assumption. I've certainly seen some interesting wedding photos involving baby feet and rings.). All of the right paper work will be in place. The IRS isn't going to think twice about $500 for modeling work aside from sending me a form to inquire what the line of work is. The business probably makes around $500K per year or so, plenty enough to justify $500/yr for a website model. FMV is determine by doing a google search online and comes to around $100/hr.

Other WCI articles on child modeling:
Starting at [00:28:05]: https://www.whitecoatinvestor.com/an...nd-podcast-51/
See #4: https://www.whitecoatinvestor.com/my...s-inheritance/
https://www.whitecoatinvestor.com/ho...-will-survive/

fair enough.

i certainly would have made the assumption that you anticipated in bold but admittedly know nothing about this world.

sounds like you've thought all of this through and will almost certainly be fine so good luck. believe me if i thought there was a legit way i could drop five hundred bones into rIRAs for my young children i would be doing it yesterday.

[SteffanW]

Business expense for never again taxed money. Lessons associated with a JOB (when older) and discussing RIRA with a teen/young adult. I'm dubious about 500/yr every year for modeling, but perhaps in the future a few dollars for shredding paper or sorting mail. OP, I'm picking up what you're laying down.

There is a good chance that the tax savings will be obliterated by the CPA expense...but knowing the process could be worth the cost. Let us know what business CPA says.

I think I can do a very simple turbo tax free for both federal and state for my kid right?

[G]

I think I can do a very simple turbo tax free for both federal and state for my kid right?

Absolutely. The question is the paperwork that grandparent's business needs to generate for them to deduct. 1099?

[SteffanW]

Absolutely. The question is the paperwork that grandparent's business needs to generate for them to deduct. 1099?

I believe it is best to go with a W2 according to the WCI articles posted above. Not sure why.