Roth and filing

Submitted by Michael Eastham on Mon, 2019-01-21 23:00

I’m having a difficult time figuring out if a tax return needs to be filed in the scenario below:
my client set up a Roth for each of his 2 children for 2018. He paid the children each $5,500 for a variety of work and chores that they did around the house/yard/etc during the year and that same money was put into the Roth that he set up. They are both claimed as dependents on my client’s tax return. Do we need to file a return for the 2 kids if this is the only income they received and there is no w-2 or other documentation showing that income was paid. Thank you in advance.



Submitted by David Mertz on Mon, 2019-01-21 23:30

Assuming that this is legitimate income from self-employment (which may be questionable) that will support a Roth IRA contribution, yes, the children must file tax returns and pay self-employment taxes.  Because the amount of this income to the children must be reduced by the deductible portion of self-employment taxes to determine the net earnings available to support a Roth IRA contribution, this $5,500 of self-employment income will only support Roth IRA contributions by each of $5,111, with anything above that being an excess contribution.  The children would each need to have received $5,918 in self-employment income in 2018 to be able to support a $5,500 Roth IRA contribution after subtracting the $418 deductible portion of self-employment taxes on the $5,918 of net profit from self-employment.

Submitted by William Tuttle on Tue, 2019-01-22 01:57

  • You can not not just have an end result and make up out of whole cloth the justification.
  • Payments for ordinary family chores and work around the house/yard may be allowances or gifts, but is not likely earned income.
  • Families can likely pay their children earned income for providing services, especially if they have in the past paid third parties for those same services (babysitting, yardwork, etc…). However, they can’t just come up with a magical $5500 number in order make the maximum Roth IRA contribution.
  • I am going to disagree with DMX on the payment issue. If there is any proper work tasks that qualifiy as earned income, the children should be paid as household help. It is hard to imagine that any dependent can meet the Behavioral Control, Financial Control and Relationship of the Parties requirements to be classified as an IC.  Also, it is counter-productive to pay them as self-employed individuals subject to SE taxes. As household help children, they are not subject to FICA/FUTA < age 21. The only thing necessary is filing a W-2 if the wages are >= $600.
  • The family should have actually paid the money to the children in a reasonably contemporaneous manner with records to prove it. This should consist of records of payments; days/times worked at fair market value wages.
  • So how old are these children and does the client have the proper records to justify the compensation from legitimate earned income? If the children are under 12 or there are no contemporaneous records, I would not feel comfortable with this.

Submitted by David Mertz on Tue, 2019-01-22 02:57

Good point on the household-help aspect.  In the absence of tax-reporting documents issued to the children I was looking at this as income from self-employment, but I agree that it would be proper to issue W-2s to the children, not treat them as independent contractors (ignoring any question of the legitimacy of treating this as compensation at all).  If the children each receive W-2s showing $5,500 in box 1, that’s sufficient to support the $5,500 Roth IRA contributions.

Submitted by Alan - IRA critic on Tue, 2019-01-22 16:21

  • But is it proper to issue a W-2 for household chores, when the IRS does not consider payments for family chores done by their own child as taxable comp?  Obviously Roth contributions have been made for years by parents in this situation (with or without a W-2) and the IRS has not been challenging them.
  •  Here’s what the late Boris Bittker, the leading authority taxation of the family, has to say on the subject:

    “Intrafamily transfers of this type can be properly viewed as excludable by a higher authority than the language of [the Internal Revenue Code] — a supposition, so obvious that it does not require explicit mention in the Code, that Congress never intended to tax them.”

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