roth ira for a minor who does cash work?

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dred pirate
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roth ira for a minor who does cash work?

Post by dred pirate »

So a friend of mine and I were talking - I plan on setting up a Roth IRA for my daughter when she is old enough to start working summer jobs, and I would just contribute to the Roth the amount she makes (up to the max). A friend of mine also has a child who does cash work (babysitting, lawn mowing, etc) for neighbors. In those cases, how do you "prove" the income? I am not trying to skirt any IRS regulations, but didn't know how to justify this as earned income - I know there is debate about paying your own child for this work, but I am talking specifically about working for others?

thanks!
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Re: roth ira for a minor who does cash work?

Post by RickBoglehead »

Prove? To who?

Like anything, you need to keep records. Then determine if a tax return needs to be filed, and if so file one. Many threads on this.
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dred pirate
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Re: roth ira for a minor who does cash work?

Post by dred pirate »

RickBoglehead wrote: Tue Jun 22, 2021 10:29 am Prove? To who?

Like anything, you need to keep records. Then determine if a tax return needs to be filed, and if so file one. Many threads on this.
to the IRS

for cash work, you can simply write it down? that doesn't seem to hold any water as anyone can fake that- but didn't know if you need official "pay stubs" to count it
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Re: roth ira for a minor who does cash work?

Post by curmudgeon »

dred pirate wrote: Tue Jun 22, 2021 10:33 am
RickBoglehead wrote: Tue Jun 22, 2021 10:29 am Prove? To who?

Like anything, you need to keep records. Then determine if a tax return needs to be filed, and if so file one. Many threads on this.
to the IRS

for cash work, you can simply write it down? that doesn't seem to hold any water as anyone can fake that- but didn't know if you need official "pay stubs" to count it
I think there is a term I've seen occasionally in IRS guidance - "reliable written record" that might apply here. I don't think it necessarily has to be pay stubs or receipts from someone else, but something like a small account book, with the dates and amounts written down as they occur, would probably suffice. Estimating it at the end of the year, or scrawls on a scrap of notebook paper, would probably not pass muster.
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Tamarind
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Re: roth ira for a minor who does cash work?

Post by Tamarind »

Pay stubs are not required. Like any sole proprietor, the child ( or parent on their behalf) should write down and keep records of how much they received, when, from whom, for what work.

In order to contribute to a Roth legally, the income needs to be reported on someone's tax return *if* a return is required. You can walk through the questionnaire here: https://www.irs.gov/help/ita/do-i-need- ... tax-return
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gwe67
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Re: roth ira for a minor who does cash work?

Post by gwe67 »

A Roth IRA is funded with post-tax income. How does cash income meet this requirement? And what do you mean by "up to the max"?
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Re: roth ira for a minor who does cash work?

Post by KlangFool »

gwe67 wrote: Tue Jun 22, 2021 10:49 am A Roth IRA is funded with post-tax income. How does cash income meet this requirement? And what do you mean by "up to the max"?
gwe67,

If the minor file a tax return and record the CASH income, the income would be taxed. And, if the amount taxed happened to be ZERO due to less than standard deduction, it is still after-tax income.

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dred pirate
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Re: roth ira for a minor who does cash work?

Post by dred pirate »

gwe67 wrote: Tue Jun 22, 2021 10:49 am A Roth IRA is funded with post-tax income. How does cash income meet this requirement? And what do you mean by "up to the max"?
cash income is still post-tax income assuming the child doesn't owe any tax, if they do owe tax, you file a tax return. I just didn't know how that would work without FICA withholding.

"up to the max" is exactly that - up the max one could contribute (either the 6k limit or 100% of their income
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dred pirate
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Re: roth ira for a minor who does cash work?

Post by dred pirate »

curmudgeon wrote: Tue Jun 22, 2021 10:40 am
dred pirate wrote: Tue Jun 22, 2021 10:33 am
RickBoglehead wrote: Tue Jun 22, 2021 10:29 am Prove? To who?

Like anything, you need to keep records. Then determine if a tax return needs to be filed, and if so file one. Many threads on this.
to the IRS

for cash work, you can simply write it down? that doesn't seem to hold any water as anyone can fake that- but didn't know if you need official "pay stubs" to count it
thanks!

I think there is a term I've seen occasionally in IRS guidance - "reliable written record" that might apply here. I don't think it necessarily has to be pay stubs or receipts from someone else, but something like a small account book, with the dates and amounts written down as they occur, would probably suffice. Estimating it at the end of the year, or scrawls on a scrap of notebook paper, would probably not pass muster.
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gwe67
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Re: roth ira for a minor who does cash work?

Post by gwe67 »

KlangFool wrote: Tue Jun 22, 2021 10:55 am
gwe67 wrote: Tue Jun 22, 2021 10:49 am A Roth IRA is funded with post-tax income. How does cash income meet this requirement? And what do you mean by "up to the max"?
gwe67,

If the minor file a tax return and record the CASH income, the income would be taxed. And, if the amount taxed happened to be ZERO due to less than standard deduction, it is still after-tax income.

KlangFool
So a tax return is required then. And surely Form 5498 as well. These kiddie Roth posts always seem to be skirting the edge of legality.
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Re: roth ira for a minor who does cash work?

Post by KlangFool »

dred pirate wrote: Tue Jun 22, 2021 11:29 am
gwe67 wrote: Tue Jun 22, 2021 10:49 am A Roth IRA is funded with post-tax income. How does cash income meet this requirement? And what do you mean by "up to the max"?
cash income is still post-tax income assuming the child doesn't owe any tax, if they do owe tax, you file a tax return. I just didn't know how that would work without FICA withholding.

"up to the max" is exactly that - up the max one could contribute (either the 6k limit or 100% of their income
dred pirate,

They would pay FICA when they file the tax return.

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dred pirate
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Re: roth ira for a minor who does cash work?

Post by dred pirate »

KlangFool wrote: Tue Jun 22, 2021 11:32 am
dred pirate wrote: Tue Jun 22, 2021 11:29 am
gwe67 wrote: Tue Jun 22, 2021 10:49 am A Roth IRA is funded with post-tax income. How does cash income meet this requirement? And what do you mean by "up to the max"?
cash income is still post-tax income assuming the child doesn't owe any tax, if they do owe tax, you file a tax return. I just didn't know how that would work without FICA withholding.

"up to the max" is exactly that - up the max one could contribute (either the 6k limit or 100% of their income
dred pirate,

They would pay FICA when they file the tax return.

KlangFool
got it - so I went to that link- would this type of work be considered self-employed income? essentially a 1099 job?
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Re: roth ira for a minor who does cash work?

Post by KlangFool »

dred pirate wrote: Tue Jun 22, 2021 11:34 am
KlangFool wrote: Tue Jun 22, 2021 11:32 am
dred pirate wrote: Tue Jun 22, 2021 11:29 am
gwe67 wrote: Tue Jun 22, 2021 10:49 am A Roth IRA is funded with post-tax income. How does cash income meet this requirement? And what do you mean by "up to the max"?
cash income is still post-tax income assuming the child doesn't owe any tax, if they do owe tax, you file a tax return. I just didn't know how that would work without FICA withholding.

"up to the max" is exactly that - up the max one could contribute (either the 6k limit or 100% of their income
dred pirate,

They would pay FICA when they file the tax return.

KlangFool
got it - so I went to that link- would this type of work be considered self-employed income? essentially a 1099 job?
Yes.

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billfromct
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Re: roth ira for a minor who does cash work?

Post by billfromct »

Also self employment tax (employee & employer Social Security & Medicare) would have to be paid for self employment of $400 or more. I believe it would be 15.3% of earnings minus expenses. I believe you can deduct 1/2 of it which would be the employer contribution.

You may want to google “self employment tax minimum earnings”.

bill
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Re: roth ira for a minor who does cash work?

Post by IMO »

billfromct wrote: Tue Jun 22, 2021 11:41 am Also self employment tax (employee & employer Social Security & Medicare) would have to be paid for self employment of $400 or more. I believe it would be 15.3% of earnings minus expenses. I believe you can deduct 1/2 of it which would be the employer contribution.

You may want to google “self employment tax minimum earnings”.

bill
Agree on this. It has to be kept on the up and up. One should also be sure to review IRS kiddie tax issues https://www.irs.gov/forms-pubs/about-publication-929

I would further add that the child would should have a bank account to deposit the work funds. As far as receipts, she would have to provide evidence of what work was done and how much she was paid for the work. Simple invoices should work.

One could hide cash income, but one could also falsify that the child earned a bunch of cash income that the parents were trying to launder into a Roth account. Seems the amount of money earned should correlate to the work being done and this would correlate to the child's age. For example, in theory, I could claim my 8 year old helped painted a rental property with me and thus I paid them $5000 in cash and give them a receipt/invoice of doing the work. Even if that were true, it would raise red flags on my side as a property owner claiming tax deductible rental expenses for myself, and for the 8 year old kid apparently doing meaningful painting. It is important to separate out not being audited for something to mean that what was done was legitimate (a common mistake I hear people do).

In most situations, it seems that simply starting a savings account and matching what the child is willing to save (vs spend) is a much easier route to accomplish teaching a child about savings, especially if were talking about under $1000 for the year.
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Re: roth ira for a minor who does cash work?

Post by RickBoglehead »

dred pirate wrote: Tue Jun 22, 2021 10:33 am
RickBoglehead wrote: Tue Jun 22, 2021 10:29 am Prove? To who?

Like anything, you need to keep records. Then determine if a tax return needs to be filed, and if so file one. Many threads on this.
to the IRS

for cash work, you can simply write it down? that doesn't seem to hold any water as anyone can fake that- but didn't know if you need official "pay stubs" to count it
Except that it does... A simple written ledger. Date, description, amount.
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Re: roth ira for a minor who does cash work?

Post by tibbitts »

dred pirate wrote: Tue Jun 22, 2021 10:20 am So a friend of mine and I were talking - I plan on setting up a Roth IRA for my daughter when she is old enough to start working summer jobs, and I would just contribute to the Roth the amount she makes (up to the max). A friend of mine also has a child who does cash work (babysitting, lawn mowing, etc) for neighbors. In those cases, how do you "prove" the income? I am not trying to skirt any IRS regulations, but didn't know how to justify this as earned income - I know there is debate about paying your own child for this work, but I am talking specifically about working for others?

thanks!
This can be a good learning experience about the implications of self-employment. If you make it too realistic you may kill off any desire for self-employment income for life, but maybe that the not the worst lesson to learn.
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Re: roth ira for a minor who does cash work?

Post by mhalley »

The ira kids site has lots of info on Roth’s for minors, plus it was started by one.
http://irakids.com/
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Re: roth ira for a minor who does cash work?

Post by 123 »

To prove the income the minor could require all payments be made by check or money order. The minor could retain copies of those checks and money orders to substantiate the entries in their work ledger.
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Re: roth ira for a minor who does cash work?

Post by FOGU »

Get the kid a little book full of generic receipts, the kind with carbon paper backing so there is a copy of each one. Fill one out for each job with minimum required information about who, what, when and how much, with customer signatures. Original to customer, carbon stays in the book and is the "corporate record."

For example:

June 23, 2021
Mowed lawn of Mrs. Jones.
123 Elm, Anytown.
$30
Paid in full.
Signed, Mrs. Jones.
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