Contribute untaxed wages to Roth IRA?

[SundayInThePark]

Hello!
This past year I've transitioned out of my job temporarily to take on caring for my elderly father, and am being compensated by the rest of my family for working as his caregiver. I'm not an official employee, and we're pretty loose about sending/receiving funds as needed. If I don't file taxes next year (I'm making less than the standard deduction for unmarried filing status), can I still contribute any of my caregiving earnings from this year to my Roth IRA?

If not, what would I need to do to be able to put those earnings towards my Roth IRA? Pay taxes on them? Start making a record of work/payments?

Thank you

[disneysteve]

I'm not an accountant so please confirm this with a professional, but I believe you need to have reported income. When our daughter was a teen and had a babysitting job, I made her file a tax return to report that income so that she could then fund her Roth. She didn't owe any taxes but it legitimized the money. I'm pretty sure you can't use an "under the table" job that's off the books to fund your Roth. The IRS wants to match that contribution to your reported income.

[SundayInThePark]

Thanks! This is basically the grownup version of babysitting money so it sounds like it's the perfect parallel.

[SecondCor521]

In the IRS's eyes, there isn't any such thing as an "unofficial employee". You're either doing it voluntarily as a family member, or you're an employee or a contractor.

First, you would need to determine if you are a W-2 employee or a 1099 contractor based on the facts and circumstances of your employment. Or, I suppose, if you're just doing it because you love your Dad and want to help out.

If a W-2, then your employer (maybe your Dad, maybe someone else in your family, depending on the situation) is required to issue you a W-2, pay their half of FICA taxes, and withhold and transmit your half of FICA wages to the federal government.

If a 1099 contractor, then your employer is required to issue you a 1099 if they make payments to you of over $600 in a year. You would be required to report that 1099 income, usually on a Schedule C. You would also generally be required to fill out Schedule SE if you made more than $400. You would pay both halves of the FICA taxes but would get an adjustment for 1/2 of that amount.

Your contribution to an IRA is limited to either box 1 wages (W-2) or net self-employment income (SE income minus business expenses minus 1/2 SE taxes).

Note that reimbursements wouldn't count as income. So if your Dad needed a walker, and you bought it for him, and he paid you back, that's not income to you.

Technically you're only required to file a tax return if your income is high enough or if you are required to pay SE taxes, plus a few other corner cases. So there can be cases where you're not required to file a return but can still have a little bit of income to qualify for an IRA contribution. Those circumstances usually involve a teenager babysitting for a few hundred dollars, as @disneysteve mentioned.

But even in those limited circumstances, you can still file a tax return to document the income, avoid failure-to-file penalties, start the statute of limitations on IRS audits, help prevent tax identity theft, and for your future records.

[pb4uski]

Technically, what you are receiving for caring for your father and babysitting money are both earned income and should be reported as income. That reported income still wouldn't be taxed if it is less than your standard deduction, though it would be subject to self-employment tax which is 15.3%.

Also technically, the family probably should have you on "payroll" in which case they would
be responsible for half of the self-employment tax (employer share of payroll taxes).

A reasonable middle ground might be to have the family pay you 107.65% of what you are currently receiving now as an "independent contractor" and issue you a 1099-MISC for that income. You claim the income on Schedule C and pay the 15.3% SE tax and it puts both you and them in the same position as if you were an employee but helps them avoid the payroll tax reporting burden... they don't need to do withholdings and remit them to the government quarterly but just need to issue you a 1099 once a year.

Then, you can make Roth coontributions because you have earned income. Also, the SE tax that you pay will be counted when your social security benefits are calculated.

Or you can continue as you are... there is negligible risk but you can't contribute to a Roth.