Real Estate Investors - paying my young kids, so they can fund a Roth

[meierlde]

Actually if by 7 or 8 you could pay a child to pull weeds by hand in the yard. Possibly also hand trimming with a pair of scissors or manual grass shears. Btw the limit for filing a tax return for earned income is 6500 a year and for unearned income is 1050 above those numbers a return is required. Note up to age 21 for example doing home lawn work is not subject to SS taxes either.

 

[RE2Boys]

Actually if by 7 or 8 you could pay a child to pull weeds by hand in the yard. Possibly also hand trimming with a pair of scissors or manual grass shears. Btw the limit for filing a tax return for earned income is 6500 a year and for unearned income is 1050 above those numbers a return is required. Note up to age 21 for example doing home lawn work is not subject to SS taxes either.

Not quite, see:
https://www.irs.gov/pub/irs-pdf/p501.pdf, pages four and five. If the earned income was from other than wages and over $400, a return is required.

 

[meierlde]

Not quite, see:
https://www.irs.gov/pub/irs-pdf/p501.pdf, pages four and five. If the earned income was from other than wages and over $400, a return is required.

But paying to take care of the lawn which I envisioned would be wages. Unless you think the child would be an independent contractor where the 400 limit applies. I would assume that pulling weeds could count as employment with the parent as an employer. Of course if the kid wanted to get in shape buy a push lawnmower and let him mow the yard that way.

 

[Blue Collar Guy]

Please dont ruin this thread with details,facts, regulations and laws. I was happy a few hours ago thinking I found a nice way to give money to future grandchildren. At this rate I might have to scrap this plan.

 

[meierlde]

Of course if you want to you could set up a 529 to pay for their education expenses.

 

[Aiming_4_55]

Please dont ruin this thread with details,facts, regulations and laws. I was happy a few hours ago thinking I found a nice way to give money to future grandchildren. At this rate I might have to scrap this plan.

I agree, I'm keeping it simple. List a few maintenance tasks that kids can perform on a weekly basis. All pay will be automated monthly payments to an Roth account as an audit trail. W2 or 1099Misc for the accountant or Turbotax to handle.

Basic tasks:

• Clean yard
• Sweep stairs
• Vacuum common hallways
• Walk around and inspect grounds
• Yard work (chasing rabbits)
• Snow removal (building snowman while I run the snowblower counts right?)
• Paint rooms (finger paint while I paint after tenant moves out)

Since I have a few properties, I think it's reasonable to pay them the limit of a Roth. It would be hard to worry about Backdoor Roths at age 10, huh?

The 529s are funded to the level I'm happy with, so I'm targeting the Roths.

 

[donheff]

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?

 

[MichaelB]

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?

There needs to be reported earned income in order to fund the ROTH accounts. That means W-2 or 1099-MISC. Because children employees are not subject to SS withholding, that seems to be a better option.

 

[RE2Boys]

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.