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Kid's earnings
Old 02-05-2005, 08:22 AM   #1
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Kid's earnings

Can someone point me to the IRS pub or tax-code reference for kid's earnings?

Our 12-year-old is at the age where financial incentives are beginning to triumph over Playstation. She's eager to run the spreadsheets, keep the books, use the tools, and do the yardwork for our rental property. Of course eagerness is in far greater supply than stamina & focus, but she can grind out a few hours a week. I'm The property manager is happy to pay her for good effort and the kid may be able to accumulate enough earnings to start funding a Roth. I'm not naïve enough to expect her to put it all into a Roth, but I think that parental/grandparental "matching contributions" would fully exploit the tax-deferral opportunity while leaving her pockets lined with enough combustible cash.

Has anyone analyzed the fiscal sense of this strategy? I know my way around Schedule E and she's filed plenty of tax returns for her UTMA income, but I'm not sure about the employer's aspect of taxation. What are the thresholds at which SS & Medicare taxes have to be paid for child labor? Do I document the kid's income with a W-2 or a 1099? Is the kid in jeopardy of having to pay taxes before she can put the earned income into a Roth?

Aside from the educational potential, is it worth the effort to document earned income for a Roth? Or would it make more $ense to gift the money into a low-cost index mutual fund? Any other hard-learned lessons that we should be aware of?


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Re: Kid's earnings
Old 02-05-2005, 04:56 PM   #2
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Re: Kid's earnings

Here is the filing requirement info:

I opened Roth IRAs for my kids once they were earning enough to open the account. I matched their earnings up to a certain amount, and opened a mutual fund Roth IRA with Vanguard. With the first kid, I filed his taxes showing earnings below the minimum to file. The IRS politely reminded me that it wasn't necessary to do so.

We did not document anything other than opening the Roth. They earned money from mowing lawns, babysitting etc.

Having their own mutual fund has taught them how the market can go up and down, and they can see the benefit of starting early.
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