Employing Children and Showing Earned Income

[Nuke]

I did search the forum and online before asking this here. I suspect that I am not phrasing the searches correctly.

BLUF: I want to pay my children to do work on my parents land this summer. I want them to show earned income for the year so that they can start Roth IRAs which my wife and I will gift them money to fund. My children are 14 and 16.

My parents recently had several acres logged and the branches from topping the trees are all over the place. I want to hire my children to clean it up. I was able to find how to employ my children for the case where i or my wife had a business. And I think I understand the rules regrading paying the children either as a W-2 employee or a 1099.

What I cannot find is how to document their payments if I don’t have a business.

My goal is to both show them earning money for Roth purposes and to show them how to do physical work. I grew up on a working dairy farm and I am very familiar with the labor involved. I think it would be a good lesson for them.

Anyone have any experience is doing what I am trying to do? I’m okay with them having to pay self-employment tax or income tax. I’m aware of the standard decuction and the fact that they don’t have to file an income tax return until they make either more than the standard decuction or more than $1500 or so in interest from investments.

Thanks in advance for any help you might give me.

 

[cathy63]

You don't need to have a business to pay someone. You can write them a check or send money via Venmo or hand them cash. They are self-employed laborers, and they have to file a tax return if they have more than $400 of self-employment income. They are responsible for tracking and reporting all of their income on their tax returns, whether or not they get a 1099.

You don't have to issue a 1099 since you're an individual, but you don't get any tax deduction for paying your kids. If your parents file a Schedule F for their farm, then they could pay the grandkids, deduct the expenses, and issue 1099s to them.

The kids' max Roth IRA contribution is their net self-employment income after subtracting their business expenses minus half the self-employment tax.

 

[Letj]

You don't need to have a business to pay someone. You can write them a check or send money via Venmo or hand them cash. They are self-employed laborers, and they have to file a tax return if they have more than $400 of self-employment income. They are responsible for tracking and reporting all of their income on their tax returns, whether or not they get a 1099.

You don't have to issue a 1099 since you're an individual, but you don't get any tax deduction for paying your kids. If your parents file a Schedule F for their farm, then they could pay the grandkids, deduct the expenses, and issue 1099s to them.

The kids' max Roth IRA contribution is their net self-employment income after subtracting their business expenses minus half the self-employment tax.

Hi Cathy,

Is it the same for a single member LLC as well in terms of not needing to file 1099s?

 

[cathy63]

An LLC has to issue a 1099 if they pay someone $600 or more during the year.

 

[teej1985]

An LLC has to issue a 1099 if they pay someone $600 or more during the year.

Wouldn't that depend on of the LLC is a sole proprietership, a partnership or a corporation? remember that LLCs do not exist federally and are disregarded.

 

[cathy63]

Wouldn't that depend on of the LLC is a sole proprietorship, a partnership or a corporation? remember that LLCs do not exist federally and are disregarded.

If you have a business, then you have to issue 1099s to any individual to whom the business pays $600 or more in a year. The rule is the same whether you file a Sched C in a personal return with or without an LLC, a partnership return, or a corporate return. Since the question was asked about an LLC, then I'm sure there's a business involved, so 1099s are required.

See here for more info: Am I required to file a Form 1099 or other information return? | Internal Revenue Service

 

[Texas Proud]

Not sure where you live but here you can start a business without anything filed with local gvmt... it is a DBA...

But, I do not think you do need to have a business... we pay a lot of people for doing business for us and do not worry about their taxes... why should 'you' have to worry about you kids? It is their problem... and yea, you will do it for them....

 

[old medic]

My question is that if they file a tax return to show income, won't you lose them as a dependent, or end up paying tax on the income you paid them? Put it in a savings or investment account for them to start a Roth in the future.

 

[cathy63]

My question is that if they file a tax return to show income, won't you lose them as a dependent, or end up paying tax on the income you paid them? Put it in a savings or investment account for them to start a Roth in the future.

As long as the child does not provide half of his or her own support, they can be claimed as a dependent no matter how much they earn. It's even possible for someone like a child actor who makes more than his parents to be their tax dependent as long as he uses his earnings for something other than supporting himself or his family.

A dependent has a Federal filing requirement if they have more than $400 of self-employment income; or more than $2600 of unearned income; or earned income + $450 exceeds $14,600. If you file a return when one is not required, then there's no tax due.

 

[Nuke]

Thanks to everyone for the discussion and pointers. Looks like a 1099 is the way to go on this. The kids will exceed $400 in self-employment income but not $14,600. So likely no tax other than the self-employment tax.