How first time wage earners (teenagers) should document cash earnings for their Roth

Submitted by Jim Pannier on Fri, 2018-05-04 19:48

I can’t believe how much money kids can earn mowing lawns and baby sitting, etc! What should young people do to document their, often cash earnings that they intend to contribute to a Roth? They don’t get a 1099 or W-2 for mowing the neighbor’s lawn or shoveling snow, but over a year it can add up to a sizeable amount.

I look forward to your advice!



Submitted by tomd37 on Fri, 2018-05-04 20:13

I suggest the child, with the help of the parents, submit a tax return each year under his/her name and social security number documenting the income.  A Schedule C (or C-EZ) and a Schedule SE would be attached to the Form 1040 documenting the income.  Don’t forget to include the reporting of valid expenses on the Schedule C if applicable. I was going to say the child should not claim a personal exemption on the return but rather let the parents claim the exemption for the child.  However starting in tax year 2018 personal and dependent exemptions are no longer applicable as they were in prior years and a higher standard deduction takes place. By filing a tax return in this manner the child has proof of qualifying for a contribution to a Roth IRA up to the limit of earnings as reported on the 1040.  Don’t mess with the IRS and don’t let them mess with you. 

Submitted by William Tuttle on Fri, 2018-05-04 23:22

  • Very few kids cutting lawns, clearing snow, babsitting, etc… can properly be treated as independent contractors.
  • They should properly be treated as household employees by the people they work for. See IRS Publication 926 Household Employer’s Tax Guide.
  • It is actually far more beneficial for them tax wise. With self-employment they will have to file a tax return and pay a 15.3% SE tax when their business profit * 0.9235 >= $400. In most cases as a household employee, there will be no FICA tax deduction and no income tax withholding and thus no payroll required
  • The problem is that most employers think there will be onerous administrative tasks required of them. Nothing could be further from the truth.
  • An individual employer is not required to file a W-2 until wages >= $600/year. Even then it costs < $5 to do it online in January.
  • An individual employer is not required to deduct FICA if the employee < 18 and a student or for others if wages >= $2100.
  • An individual employer is not required to pay FUTA/SUTA unless wages are >= $1000/quarter.
  • An individual employer is not required to withhold income taxes if they receive a completed W-4 claiming an exmption from withholdding (by 02/15 subsequent years). This is a virtual certainty now with a $12,000 standard deduction.
  • The children should document every “employment” and payment. They will need this proof if they do not receive wages >= an individual employer. Each employer they receive >= $600/year should file a W-2 in January. It is extremely remote that they will receive enough wages from any one employer requiring FICA deductions.
  • There is no reason to file a tax return with no tax liability. In fact I did that for my oldest and the IRS sent a notice “don’t do that!” You will have your records for wages < $600 and W-2s for wages >= 600.
  • The parents will clearly have to run interference with the “employers” to assuage their concerns that at most all that is needed is a W-2 in January.

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