Paying children for work in business and Roth contributions

[NgineER]

I thought I’d post this here where people aren’t as extreme with tax deductions as other forums tend to be. My wife and I have five properties and my two oldest kids mow the lawns for the properties and they get paid for it. We have so far just paid them and taken the expense off our gross income for the properties.
I was considering contributing the same amount they get paid into a Roth IRA to start compounding early... Also considering matching their contributions as well up to their earned income limit.
I’ve also brought kids along to help me with other projects such as installing new tension springs in a garage door. Redoing some electric work and pouring some concrete countertops.

Has anyone done something like this? Hiring their kids to do work and the.n contributing to a Roth IRA? I have read that they need to receive a W2 from you, but then others say you don’t need to do that because the penalty is based on taxes due and if they are not paid a lot then there are no taxes due.

Looking for any insight here from you who have done this.

 

[SecondCor521]

My kids all started Roth IRAs in their teens. They contributed based on their earned income, although it was not usually from me - it was from mowing the neighbors' lawns, tutoring, etc.

They did not get W-2s or 1099-MISCs from their employers because (a) they were treated as contractors, and (b) it was below the reporting limits for 1099s ($600 per year).

They also did not file because they were below the filing requirements for dependents (See Chart B in the instructions for Form 1040).

They also did not owe self-employment taxes because their net income was less than $400 per year.

It is legal to hire your kids in your business, to deduct the cost of their labor in your rental business, and for them to use that earned income for Roth IRA contributions. It's also legal for you and your wife to each give each of your kids $15K per year as gifts.

What is not legal is paying your kids more than market rate for the work. You can't pay them $600 to mow your lawn once, for example.

If your kids earn enough, you'll be required to issue them a 1099. I believe the limit is $600. There might also be self-employment taxes for them or you to pay. They may or may not be required to file a 1040 depending on their earned, unearned, and gross income (again, see Chart B in the instructions to Form 1040).

Whether you issue your kids a W2 or a 1099 depends on the nature of their work and whether they should be classified as employees (W2) or independent contractors (1099). From a quick google check, there is no minimum for a W2, so if your children should properly be classified as employees, then if you pay them anything you'd legally be obligated to send/give them a W2.

The point is, there are different thresholds and rules for all these things, and you and your children are responsible for learning and complying with those rules. But yes, broadly speaking, hiring your kids to work on rental properties and then having them start Roth IRAs at a young age is an excellent start for them.

 

[euro]

Excellent summary by SecondCor521.
I have done this for both of my kids with income they gathered from me (rental property maintenance also) and other gigs (such as babysitting).
One comment though about the OP’s question as to whether he should “match” the contributions: you can’t do an employer match for IRA’s to my knowledge. That would require a 401k setup (I assume that is technically possible if the kids are classified as employees, but I’m sure that would entail a lot of additional paperwork).

 

[The Cosmic Avenger]

Excellent summary by SecondCor521.
I have done this for both of my kids with income they gathered from me (rental property maintenance also) and other gigs (such as babysitting).
One comment though about the OP’s question as to whether he should “match” the contributions: you can’t do an employer match for IRA’s to my knowledge. That would require a 401k setup (I assume that is technically possible if the kids are classified as employees, but I’m sure that would entail a lot of additional paperwork).

Well, you can agree to gift your child 100% of their net income after they contribute 100% of that income (assuming it's below the contribution limit) to a Roth IRA. That's what we did for the first year our child worked, so they would 1) start compounding early, and 2) see the results of such. Of course, since money is fungible, we just stuck "our" money directly into the Roth.

 

[38Chevy454]

I think it's a great idea to have them start the Roth early. They can learn some basic investing and see the growth. But also make sure they can have some fun money form their earnings to buy things "with their money". That also helps teach them what it takes to earn money and be able to buy something.


I am not a tax expert, but it is probably simplest for you to 1099 them rather than W-2. Easier on your taxes and they may not even owe any taxes depending on total earnings. But that gives a no argument proof of the earned income to put into the Roth. Good for you to do the matching amounts, gives them incentive right off the start.

 

[NgineER]

Thanks for the responses so far. Yeah-by matching I meant that we’d contribute half and the kids half leaving them some pocket money as well. They are mainly just collecting the money but we are trying to encourage them to spend some of it while saving and donating.

 

[Gumby]

If they are your W2 employees, wouldn't you need to deduct and submit FICA/Medicare withholding?

 

[NgineER]

If they are your W2 employees, wouldn't you need to deduct and submit FICA/Medicare withholding?

This is what I’m hoping to get some insights into...

I’ve found this in the web. “Employing Family Members: Payroll Tax Exemptions
If you hire a family member under the age of 18, you need not withhold (and your family member doesn't owe) FICA taxes.”

https://www.employmentlawfirms.com/resources/payroll-tax-exemptions-for-family-members.html

 

[SecondCor521]

^ I believe that is correct that there is an exemption for family members employed in a family business.

The thing I would check into is whether there is a limit to the amount of compensation that you can do that with. I think there is, and I think it's rather low ($400? $600?), but I'm not sure on the details.

 

[Gumby]

This is what I’m hoping to get some insights into...

I’ve found this in the web. “Employing Family Members: Payroll Tax Exemptions
If you hire a family member under the age of 18, you need not withhold (and your family member doesn't owe) FICA taxes.”

https://www.employmentlawfirms.com/resources/payroll-tax-exemptions-for-family-members.html

I did a little poking around and found this on the IRS website

Child employed by parents. Payments for the services of a child under age 18 who works for his or her parent in a trade or business aren't subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child. If these payments are for work other than in a trade or business, such as domestic work in the parent's private home, they’re not subject to social security and Medicare taxes until the child reaches age 21. However, see Covered services of a child or spouse, later. Payments for the services of a child under age 21 who works for his or her parent, whether or not in a trade or business, aren't subject to FUTA tax. Payments for the services of a child of any age who works for his or her parent are generally subject to income tax withholding unless the payments are for domestic work in the parent's home, or unless the payments are for work other than in a trade or business and are less than $50 in the quarter or the child isn't regularly employed to do such work.

Source: https://www.irs.gov/pub/irs-pdf/p15.pdf

So it appears the answer to my earlier question is 'no'.

 

[NgineER]

Thanks!