Business Client wants to 'hire' his seven year old child to clean his office. Over the course of the year he plans to pay the child $5,000. Wants to open a custodial IRA for the child and contribute $5,000. I would think if the child is an employee that a W2 would be issued. Or if paid as a contractor a 1099NEC would be issued. I would also think that IRS would want to be able to match the IRA contribution to the earned income. Thus, I would think the child would file a 1040 to show this income. The primary question that I'm not finding an answer for is this: Must the child file a 1040 so the IRS can match up the IRA contribution against this income? A different scenario might be that a teenager mows lawns and makes $2,500 in cash. If the child does not receive a W2 or a 1099 and does not file a 1040, can the parent still contribute to the custodial IRA? Seems like with no 1040, the custodial IRA contribution would be challenged by IRS.
-
-
Wow - a 7 year old is an independent contractor (I assume the child has his/her own cleaning tools, other clients he/she cleans for and so on).Originally posted by Hoosier View Post
Please - get real - you used “hire” in quotes - you know this is just _____________ (fill in a barnyard epithet) -
That IC making $400 or more has to file a return to pay SE tax. The employee making less than the filing threshold might not have to file. But don't you want the paper trail?Comment
-
I totally agree with the assessment by NYEA.
While there definitely IS a possibility of funding a Roth IRA for a minor, there has to be somewhere to show where the qualifying income for such came from. That would either be a W2 , or via a Schedule C and payment of all applicable self-employment tax on the income.
So...has the kid considered setting up an LLC or an S Corp?
Comment
-
Yes, if your business client hires his child to work for his business, the child would be issued a W-2 because the child would be an employee.
I don't see a need to file a 1040 for the child just because they are contributing to a Roth IRA. The W-2 would already be proof of earned income.
The child must be paid an appropriate amount (not too high; suitable for the amount of work the kid performs) and be treated as an employee. Some taxpayers want to pay the child excessive amounts that that starts entering the realm of tax fraud.
You didn't mention if your client is self-employed (Schedule C) or a corporation, but that will affect what is required for paying the child/employee.Comment
-
Just to clarify a few items here. My client is asking me about setting up a Custodial IRA, a topic I have not encountered until now. I'm beginning to conduct some independent research and posted my original post on this board to get the ball rolling. Although I've seen it from time to time on this board, I didn't think my post would generate snarky and condescending responses. I can assure you that I'm already real, thus I don't need to 'get real'. I'll help you out with the barnyard epithet - its total BS. Yes, I know it and you know it. But, my client is asking for guidance and I'd like to be able to get up to speed on the topic so I can create some value. For me, part of getting up to speed is communicating with other tax professionals to see if they have skill or experience with the topic. I've learned something today - just not what I was expecting. Although I consider this to be a negative TaxBook Message Board episode, I'm going to assume it's an isolated incident.Comment
-
It would be in violation of labor laws. https://kb.dol.in.gov/?tagIds=ce457c...d-ed0adcb3290b
Comment
-
In Wisconsin, it is not in violation of labor laws, so I guess it varies from state to state. As far as the posters question I believe a W2 would be in order as well as filing a 1040 for child, but that is what I would do. Not sure if IRS requires it, but I don't like my clients getting letters from themComment
-
Someone must be having a very bad day??
If the only (apparent) question is how to set up a custodial Roth IRA, that is a piece of cake. The minor cannot own such an account, so it is titled in the name of a trustee/custodian...usually a parent. Once the youth reaches adulthood, the account automatically changes to only the name of the former child.
I set up such accounts for my children while they had summer jobs in high school. I seem to recall the maximum I could place in the account one year was less than $500, based on the W-2 income from waitressing.Comment
-
Yes, it does vary by state. OP is in IN, so I assumed client is also.Originally posted by terryats View Post
Sometimes we just have to tell clients that can't do what they want, or to go somewhere else if they insist. Client not only wants child to have an IRA but by paying child would also reduce parent taxable income. I think we all know paying a 7 yo does not pass the smell test and would be disallowed if IRS pulls return. Want to take a guess who client would blame?
Easiest way to avoid an argument with client is to tell them state law does not allow hiring a child of that age to clean office.Last edited by kathyc2; 08-30-2024, 12:48 PM.Comment
-
The IRS has no age limit for opening an IRA; the custodial issue is more about bank law and regs, not tax.
It may be a stretch to consider a 7 year old able to earn enough to make contributions worthwhile, but I'm sure plenty of people do it. And I think the IRS does not spend much time comparing Form 5498 info to the tax return earned income, especially since the return could be filed and done with before the 5498 is even issued (or not even filed if below the requirement).
They don't seem to have a problem with how Peter Thiel managed to get over five billion dollars in his Roth IRA*, so why would they bother with a 7 year old who is just getting some unrealized capital gain (which wouldn't be taxed up front if in an ordinary investment account anyway?
"Although I consider this to be a negative TaxBook Message Board episode, I'm going to assume it's an isolated incident."
It's nothing to get upset about; you are asking a question of strangers on the internet in a public forum, you should have a moderately thick skin before doing so, as obviously since no one knows who you are (unless you choose to tell them), there is no reason to take it personally. There is nothing "snarky" about being skeptical regarding a 7 year old earning, say, $7,000 in a year doing legitimately-paid work.
* https://www.propublica.org/article/l...ree-piggy-bank"You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe HowardComment
Comment