Can my daughter use baby-sitting money to contribute to a Roth IRA if she didn't keep good records of it?

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privateID
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Can my daughter use baby-sitting money to contribute to a Roth IRA if she didn't keep good records of it?

Post by privateID »

My daughter made over $2,000 baby-sitting in 2021. She did not keep records of it. Sometimes she was paid via Venmo and other times cash. I believe baby-sitting money could be considered income to contribute to an IRA. I'm curious if people think the lack of record keeping is an issue.

Thanks
Makefile
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Re: Can my daughter use baby-sitting money to contribute to a Roth IRA if she didn't keep good records of it?

Post by Makefile »

With more than $400 in net self employment income you owe a 15.3% self employment tax, so yes, it is an issue.
oldfatguy
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Re: Can my daughter use baby-sitting money to contribute to a Roth IRA if she didn't keep good records of it?

Post by oldfatguy »

privateID wrote: Wed Dec 08, 2021 10:34 am My daughter made over $2,000 baby-sitting in 2021. She did not keep records of it. Sometimes she was paid via Venmo and other times cash. I believe baby-sitting money could be considered income to contribute to an IRA. I'm curious if people think the lack of record keeping is an issue.

Thanks
If she didn't keep track, how does she know that she made over 2K? I would suggest that she create a record of her income as best she can (maybe she has a calendar, emails, texts, bank deposits, etc. that show most of her gigs).
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dodecahedron
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Re: Can my daughter use baby-sitting money to contribute to a Roth IRA if she didn't keep good records of it?

Post by dodecahedron »

privateID wrote: Wed Dec 08, 2021 10:34 am My daughter made over $2,000 baby-sitting in 2021. She did not keep records of it. Sometimes she was paid via Venmo and other times cash. I believe baby-sitting money could be considered income to contribute to an IRA. I'm curious if people think the lack of record keeping is an issue.

Thanks
How old is your daughter? If she is 18 or over, she has a 1040 filing requirement to report any babysitting earnings in excess of $400 (and pay self-employment taxes on them).

Even if she is under 18, I would encourage her to reconstruct records to the best of her ability. (She could perhaps retrieve emails or text message records from her clients requesting her services, estimate the number of hours worked and multiply by hourly pay.) Write it all down in an orderly manner and keep that record to support IRA contribution. If there is uncertainty, I would err on the side of conservativism in estimating for IRA contribution purposes.

Going forward, encourage her to operate in a more business-like manner. She could just send an email to herself after every babysitting gig memorializing the amount of money earned and tag that email to make it easy to retrieve.
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dodecahedron
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Re: Can my daughter use baby-sitting money to contribute to a Roth IRA if she didn't keep good records of it?

Post by dodecahedron »

Makefile wrote: Wed Dec 08, 2021 10:38 am With more than $400 in net self employment income you owe a 15.3% self employment tax, so yes, it is an issue.
There is an exception to this rule for babysitters under age 18. Hopefully that applies to the OP's daughter. But yes, you are correct if daughter is 18 or over, and there is a legal obligation to keep accurate records.
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Re: Can my daughter use baby-sitting money to contribute to a Roth IRA if she didn't keep good records of it?

Post by jebmke »

Makefile wrote: Wed Dec 08, 2021 10:38 am With more than $400 in net self employment income you owe a 15.3% self employment tax, so yes, it is an issue.
Yes; I think net SE earnings > $400 required to file a tax return so the amount should be documented on that return.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: Can my daughter use baby-sitting money to contribute to a Roth IRA if she didn't keep good records of it?

Post by Makefile »

dodecahedron wrote: Wed Dec 08, 2021 10:45 am
Makefile wrote: Wed Dec 08, 2021 10:38 am With more than $400 in net self employment income you owe a 15.3% self employment tax, so yes, it is an issue.
There is an exception to this rule for babysitters under age 18. Hopefully that applies to the OP's daughter. But yes, you are correct if daughter is 18 or over, and there is a legal obligation to keep accurate records.
Interesting. If the income doesn't count for SE tax yet counts for a Roth, seems like a way to have your cake and eat it too.
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Re: Can my daughter use baby-sitting money to contribute to a Roth IRA if she didn't keep good records of it?

Post by jebmke »

Makefile wrote: Wed Dec 08, 2021 10:46 am
dodecahedron wrote: Wed Dec 08, 2021 10:45 am
Makefile wrote: Wed Dec 08, 2021 10:38 am With more than $400 in net self employment income you owe a 15.3% self employment tax, so yes, it is an issue.
There is an exception to this rule for babysitters under age 18. Hopefully that applies to the OP's daughter. But yes, you are correct if daughter is 18 or over, and there is a legal obligation to keep accurate records.
Interesting. If the income doesn't count for SE tax yet counts for a Roth, seems like a way to have your cake and eat it too.
Keep in mind that the criterion for IRAs is "compensation" - not "earned income" -- these are sometimes conflated but are not always the same. Back when alimony was taxable for the recipient it was considered compensation but I don't recall if it was considered "earned income" for something like EITC, for example.

I see dodec has noted the exception to the SE income reporting.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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privateID
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Re: Can my daughter use baby-sitting money to contribute to a Roth IRA if she didn't keep good records of it?

Post by privateID »

Let me try to summarize what has been said:
1) If you make under $400, there is no filing requirement.
2) If you make more than $400 and are under 18, there is no filing requirement.
3) If you make more than $400 and are 18 or older, there is a filing requirement.

In all cases, you can contribute the amount made to an IRA.

I will need to ask my daughter to figure out how much she made. I am guessing she is mixing up a bit 2020 with 2021 (she started babysitting at the beginning of Covid). I am also guessing she exaggerated the earnings, but we will figure that out.
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Re: Can my daughter use baby-sitting money to contribute to a Roth IRA if she didn't keep good records of it?

Post by TropikThunder »

This is a minor point in the scheme of things, but if you pay someone for goods or services through Venmo, you’re supposed to indicate that when setting up the transaction. And starting in 2022, the P2P payment systems will have an IRS tracking and reporting requirement for their clients (albeit at a transaction level higher than a babysitter will generate).
rkhusky
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Re: Can my daughter use baby-sitting money to contribute to a Roth IRA if she didn't keep good records of it?

Post by rkhusky »

You could provide matching funds for her Roth contributions and let her keep some of the cash for spending.
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Re: Can my daughter use baby-sitting money to contribute to a Roth IRA if she didn't keep good records of it?

Post by Wanderingwheelz »

rkhusky wrote: Wed Dec 08, 2021 12:38 pm You could provide matching funds for her Roth contributions and let her keep some of the cash for spending.
That’s what we do. We match up to $3,000.
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privateID
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Re: Can my daughter use baby-sitting money to contribute to a Roth IRA if she didn't keep good records of it?

Post by privateID »

Wanderingwheelz wrote: Wed Dec 08, 2021 12:46 pm
rkhusky wrote: Wed Dec 08, 2021 12:38 pm You could provide matching funds for her Roth contributions and let her keep some of the cash for spending.
That’s what we do. We match up to $3,000.
That is what the grandparents do in our case.
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CAsage
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Re: Can my daughter use baby-sitting money to contribute to a Roth IRA if she didn't keep good records of it?

Post by CAsage »

I will note that the "matching" funds either go into the daughter's pocket or fund the IRA; one cannot increase the Roth IRA with matching funds. Friends of mine have opened Roths for their teen babysitting or yard care jobs. I would suggest you make a good faith effort, with your daughter, to recreate some sort of record based on Venmo or her calendar, then file that away as "best effort". Then for 2022 come up with a good system.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.
rkhusky
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Re: Can my daughter use baby-sitting money to contribute to a Roth IRA if she didn't keep good records of it?

Post by rkhusky »

dodecahedron wrote: Wed Dec 08, 2021 10:45 am
Makefile wrote: Wed Dec 08, 2021 10:38 am With more than $400 in net self employment income you owe a 15.3% self employment tax, so yes, it is an issue.
There is an exception to this rule for babysitters under age 18. Hopefully that applies to the OP's daughter. But yes, you are correct if daughter is 18 or over, and there is a legal obligation to keep accurate records.
Babysitters are considered Household Employees if they are performing the work at their employer's home. Household employers do not need to withhold employment taxes or contribute the employer's portion, if the total amount paid to the employee during the year is less than $2300 or the employee was under 18 anytime during the year (unless babysitting is the employee's main occupation, which is never the case if the employee is a student).

If an employer is not required to pay the employment taxes, is the employee on the hook to do that, even if they are not considered to be self-employed?

Edit:
Found this on the IRS web site
For the most part, the employer withholds these taxes on behalf of their employees, but in cases where an employer does not do this, or where an employee is self-employed, it is the responsibility of the employee to pay these withholding taxes.
Regarding the latter part, it is not clear if they are meaning employers who are supposed to withhold, but don't, or if it also includes employers who are not required to withhold.
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dodecahedron
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Re: Can my daughter use baby-sitting money to contribute to a Roth IRA if she didn't keep good records of it?

Post by dodecahedron »

rkhusky wrote: Wed Dec 08, 2021 1:19 pm
dodecahedron wrote: Wed Dec 08, 2021 10:45 am
Makefile wrote: Wed Dec 08, 2021 10:38 am With more than $400 in net self employment income you owe a 15.3% self employment tax, so yes, it is an issue.
There is an exception to this rule for babysitters under age 18. Hopefully that applies to the OP's daughter. But yes, you are correct if daughter is 18 or over, and there is a legal obligation to keep accurate records.
Babysitters are considered Household Employees if they are performing the work at their employer's home. Household employers do not need to withhold employment taxes or contribute the employer's portion, if the total amount paid to the employee during the year is less than $2300 or the employee was under 18 anytime during the year (unless babysitting is the employee's main occupation, which is never the case if the employee is a student).

If an employer is not required to pay the employment taxes, is the employee on the hook to do that, even if they are not considered to be self-employed?

Edit:
Found this on the IRS web site
For the most part, the employer withholds these taxes on behalf of their employees, but in cases where an employer does not do this, or where an employee is self-employed, it is the responsibility of the employee to pay these withholding taxes.
Regarding the latter part, it is not clear if they are meaning employers who are supposed to withhold, but don't, or if it also includes employers who are not required to withhold.
Kiplinger says no and I agree with their reasoning. Teenage babysitters under 18 are not "self-employed" and are not subject to self-employment tax. To the extent they are required to report the income at all (e.g., suppose that this babysitter who earned $2K babysitting had enough income from other sources, e.g., investment income, to trigger a 1040 filing requirement), babysitting earnings would be included as part of her AGI used in computation of taxable income subject to income tax. But a babysitter under age 18 is not deemed by the IRS and SSA to be "in the trade or business of babysitting" for the purposes of self-employment FICA taxes.

The treatment is similar to work-study students working at the college they attend. The colleges do not withhold or remit SS and Medicare taxes on behalf of their workstudy students. The students report their wages on their income taxes but do not file a Schedule SE because the work study earnings are also not self-employment income.

Apparently there is also a similar exception for newspaper carriers under 18.
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Re: Can my daughter use baby-sitting money to contribute to a Roth IRA if she didn't keep good records of it?

Post by A-Commoner »

If the child who is earning money as a babysitter or doing other odd jobs but still lives with parents and otherwise is claimed as dependent on the parents tax returns, does this affect the parents’ tax filing in any way? So the child files a separate tax return for her earnings even though she is claimed as dependent by the parents? Sorry if this may sound like a stupid question with an obvious answer, but I honestly don’t know.
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Re: Can my daughter use baby-sitting money to contribute to a Roth IRA if she didn't keep good records of it?

Post by rkhusky »

A-Commoner wrote: Wed Dec 08, 2021 2:44 pm If the child who is earning money as a babysitter or doing other odd jobs but still lives with parents and otherwise is claimed as dependent on the parents tax returns, does this affect the parents’ tax filing in any way? So the child files a separate tax return for her earnings even though she is claimed as dependent by the parents? Sorry if this may sound like a stupid question with an obvious answer, but I honestly don’t know.
There is a spot on the tax form that asks whether the filer can be claimed as a dependent on someone else’s tax form. So, being a dependent does not preclude one from filing a return. And you don’t add your child’s income to your own.
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Re: Can my daughter use baby-sitting money to contribute to a Roth IRA if she didn't keep good records of it?

Post by rkhusky »

dodecahedron wrote: Wed Dec 08, 2021 2:35 pm
Kiplinger says no and I agree with their reasoning. Teenage babysitters under 18 are not "self-employed" and are not subject to self-employment tax. To the extent they are required to report the income at all (e.g., suppose that this babysitter who earned $2K babysitting had enough income from other sources, e.g., investment income, to trigger a 1040 filing requirement), babysitting earnings would be included as part of her AGI used in computation of taxable income subject to income tax. But a babysitter under age 18 is not deemed by the IRS and SSA to be "in the trade or business of babysitting" for the purposes of self-employment FICA taxes.

The treatment is similar to work-study students working at the college they attend. The colleges do not withhold or remit SS and Medicare taxes on behalf of their workstudy students. The students report their wages on their income taxes but do not file a Schedule SE because the work study earnings are also not self-employment income.

Apparently there is also a similar exception for newspaper carriers under 18.
I am not finding any IRS sources that differentiate under-18 from 18-and-over, if the Household Employee annual wages are under $2300.

So, are 18-and-over Household Employees liable for paying employment taxes if their wages from each employer is less than $2300?
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dodecahedron
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Re: Can my daughter use baby-sitting money to contribute to a Roth IRA if she didn't keep good records of it?

Post by dodecahedron »

rkhusky wrote: Wed Dec 08, 2021 3:00 pm I am not finding any IRS sources that differentiate under-18 from 18-and-over, if the Household Employee annual wages are under $2300.
See page 6 of IRS Pub 926 in the second column under boldfaced section Wages Not Counted item #4.

If your household employee is "under 18 at any time during the tax year," their wages are not counted as SS or Medicare wages. There is an exception if "providing household services is the employee's principal occupation," but this is automatically deemed NOT to be the case for employees who are students. So aside from the rare case of folks who hire under age 18 school dropouts (or perhaps precocious Doogie Howsers) as babysitters, wages paid to teen babysitters under 18 are not subject to Household Employee withholding for SS and Medicare taxes.
rkhusky wrote: Wed Dec 08, 2021 3:00 pm So, are 18-and-over Household Employees liable for paying employment taxes if their wages from each employer is less than $2300?
According to IRS Pub 926, the answer is no. As for employers who pay total household employees wages under $2300, the IRS says (on the same page, in the first column), "neither you nor your employee will owe social security and Medicare taxes on those wages." This is apparently true regardless of the household employee's age.
Last edited by dodecahedron on Wed Dec 08, 2021 3:35 pm, edited 2 times in total.
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privateID
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Re: Can my daughter use baby-sitting money to contribute to a Roth IRA if she didn't keep good records of it?

Post by privateID »

Here's what I see (https://www.irs.gov/publications/p926):
Social security and Medicare wages. You figure social security and Medicare taxes on the social security and Medicare wages you pay your employee. If you pay your household employee cash wages of $2,300 or more in 2021, all cash wages you pay to that employee in 2021 (regardless of when the wages were earned) up to $142,800 are social security wages and all cash wages are Medicare wages. However, any noncash wages you pay don't count as social security and Medicare wages. If you pay the employee less than $2,300 in cash wages in 2021, none of the wages you pay the employee are social security or Medicare wages and neither you nor your employee will owe social security or Medicare tax on those wages.
Sounds to me that regardless of age, the employee and the employer do not pay these taxes.

So, back to my original question. Assuming my daughter made some amount under $2,300 babysitting and she is considered a household employee, then should would report this amount on her taxes. However, she would not owe any taxes with such a small amount with the standard deduction. But she would be able to contribute that amount to an IRA.

Do I have that right?
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dodecahedron
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Re: Can my daughter use baby-sitting money to contribute to a Roth IRA if she didn't keep good records of it?

Post by dodecahedron »

privateID wrote: Wed Dec 08, 2021 3:31 pm Here's what I see (https://www.irs.gov/publications/p926):
Social security and Medicare wages. You figure social security and Medicare taxes on the social security and Medicare wages you pay your employee. If you pay your household employee cash wages of $2,300 or more in 2021, all cash wages you pay to that employee in 2021 (regardless of when the wages were earned) up to $142,800 are social security wages and all cash wages are Medicare wages. However, any noncash wages you pay don't count as social security and Medicare wages. If you pay the employee less than $2,300 in cash wages in 2021, none of the wages you pay the employee are social security or Medicare wages and neither you nor your employee will owe social security or Medicare tax on those wages.
Sounds to me that regardless of age, the employee and the employer do not pay these taxes. Right.

So, back to my original question. Assuming my daughter made some amount under $2,300 babysitting and she is considered a household employee, then should would report this amount on her taxes. If this is her only income, she has no filing requirement, but she could file if she wants to do so. It will be educational to introduce her to the system and it also protects against identity theft. She should definitely check the box saying she can be claimed by another taxpayer as a dependent if she files. Otherwise, this will create issues on your return.However, she would not owe any taxes with such a small amount with the standard deduction. Correct. But she would be able to contribute that amount to an IRA. Yes, I believe so.

Do I have that right?
Yes, but encourage her to keep good records going forward (and reconstruct past records with a good faith effort, estimating on the conservative side for purposes of supporting the Roth contribution. It would not hurt to retain email and text messages from her babysitting clients for that reconstructed effort.)
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Re: Can my daughter use baby-sitting money to contribute to a Roth IRA if she didn't keep good records of it?

Post by rkhusky »

dodecahedron wrote: Wed Dec 08, 2021 3:29 pm
rkhusky wrote: Wed Dec 08, 2021 3:00 pm So, are 18-and-over Household Employees liable for paying employment taxes if their wages from each employer is less than $2300?
According to IRS Pub 926, the answer is no. As for employers who pay total household employees wages under $2300, the IRS says (on the same page, in the first column), "neither you nor your employee will owe social security and Medicare taxes on those wages." This is apparently true regardless of the household employee's age.
Thanks. I had run across an IRS flyer a while back that said that kids mowing lawns should pay self employment taxes. But that appears to be incorrect, unless the kid has a legitimate business with their own equipment and limited control from the customers.
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privateID
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Re: Can my daughter use baby-sitting money to contribute to a Roth IRA if she didn't keep good records of it?

Post by privateID »

rkhusky wrote: Wed Dec 08, 2021 4:57 pm
dodecahedron wrote: Wed Dec 08, 2021 3:29 pm
rkhusky wrote: Wed Dec 08, 2021 3:00 pm So, are 18-and-over Household Employees liable for paying employment taxes if their wages from each employer is less than $2300?
According to IRS Pub 926, the answer is no. As for employers who pay total household employees wages under $2300, the IRS says (on the same page, in the first column), "neither you nor your employee will owe social security and Medicare taxes on those wages." This is apparently true regardless of the household employee's age.
Thanks. I had run across an IRS flyer a while back that said that kids mowing lawns should pay self employment taxes. But that appears to be incorrect, unless the kid has a legitimate business with their own equipment and limited control from the customers.
I think there are alot of places on the web that say babysitting is self employment income without any qualification. So, even though I think it is straight forward in Pub 926, I think there is certainly uncertainty out there.
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