What I am confused about is the need for W2s and tax returns. Lets take the example of a kid who baby sits. If earnings are low the kid doesn't need to file tax returns. Can the kid fund a ROTH up to the amount of earnings and skip all the filings? Or does the kid need to file to qualify for the ROTH and, if so, withhold self employment tax?
Simple example: A kid babysits for three neighbors on an occasional basis, not a regular job and earns a total of $500, paid as cash, neighbors don't consider him/her an employee but contract with the kid on an occasional basis.
The kid is considered a self-employed person offering baby sitting services. The kid has no expenses to deduct.
No one person paid the kid over $600 in the year (if they did, the neighbor would have a legal requirement to provide the child and the IRS a 1099MISC).
Since the child's net profit was $500, a tax return is required by law to be filed (self-employment profit over $400). They would owe no income tax as their standard deduction would be $800 (feel free to look it up if you so choose). However, they would be subject to the self-employment tax (Schedule SE) and would owe $70 when they file their income tax return. That income would now be part of the child's official social security records. And $500 can be contributed to the child's Roth IRA.
Do folks always follow the law? I suspect there is a lot of tax cheating/ignorance going on but I can't advocate cheating on taxes, especially in a public forum.
The law requires every individual to report all income, regardless of age, if they are otherwise required to file a tax return. Income is to be reported, whether you receive a tax document or not.
Change the situation where a child works for the parent and is paid $5000 and receives a W2 from the parent for mowing grass at the parent's apartments.
Since parent is owner, no SS taxes required to be withheld (other withholding may apply such as state taxes). Child is not required to file a federal tax return as total income below threshold for wage income (W2). Since earned income was reported to the IRS, child can make $5000 contribution to a Roth IRA.