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« Free Money Finance March Money Madness, Round 1, Posts 33-36 | Main | Saving a Bundle on Your Taxes with an Unrelated Dependent »

February 05, 2010


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Good job. Just like a CPA (I hope) to optimize finances.

This is a smart idea. I just emailed it to my 14 year old sister, thanks!

When I first read this headline I thought to myself.... How silly, that's overkill to report a baby sitters wages. But, after reading it with the Roth in mind... Hey, Good idea!

Please excuse my ignorance on this... why a 1040 and not a 1040EZ?

Great idea. Thanks for sharing.

I wasn't aware of the Roth IRA benefit for a home purchase. Thanks!

This is great! I wish my parents had done this when I was babysitting.

As a stay-at-home dad, could I pull off something similar to allow me to fund my Roth IRA? Could my wife pay me to babysit our son? Or would the self-employment taxes / social security / etc. make it not really worth the effort?

Stay-at-home parents can open a Roth funny stuff needed as long as you meet the income restrictions. I found this at Smart Money.

The Nonworking Spouse

A nonworking spouse can make a deductible IRA contribution of up to $5,000 for 2010 ($6,000 if age 50 or older as of 12/31/10) as long as the couple files a joint return, and the working spouse has enough earned income to cover the contribution. However, the deductibility of the nonworking spouse's contribution for 2010 is phased out for couples with adjusted gross income (AGI) between $167,000 and $177,000, provided that the working spouse is covered by a qualified retirement plan (via a job or self-employment). The working spouse's ability to make a deductible contribution for 2010 is phased out between AGI of $89,000 and $109,000.

Wanta learn another tip? I learned this tidbit from our government officials - don't pay your taxes at all. don't worry, you'll still get appointed an excellent cabinet position.

This is an excellent idea. I have a toddler now, but I will make sure we file a tax return and open an Roth IRA for him. Roth IRA is a wonderful tool.

Rory asked, "Please excuse my ignorance on this... why a 1040 and not a 1040EZ?"

1040EZ would work well too.

I thought that since you contributed to a Roth with after-tax money, you could withdraw your original contributions at any time with no penalty. The earnings have to stay in there, but right now, mine's pretty much worth exactly the same as what I've contributed over the past 8 years, so I can pull almost all of it out.

MasterPo has never seen any broker or mutual fund has ever asked for income verification when opening an IRA. Or for that matter income verification if you're opening a ROTH IRA (for qualification reasons).

MasterPo's income is variable to some extent due to investment returns so it isn't clear early or mid-year whether MasterPo would qualify for a ROTH or just traditional. However, MasterPo usually doesn't want to wait until the end of year to find out.

Never received anything from a broker/mutual fund or the IRS saying a ROTH contribution shouldn't have been made for a given tax year.

NTL, MasterPo likes your idea. Also gets the kids trained to keep records and prepared for the realities of growing up. Right now MasterPo knows a girl in her mid-20's who, by her own account, did NOT file a 2008 income tax return because she felt she made so little (don't know exactly what she made working part-time in a bistro, but she did say her employer issued her a W-2). MasterPo and others have tried very hard to get her to understand she MUST file if W-2 was issued even if she doesn't owe any taxes. Penalties and interest may be piling up into the THOUSANDS by now!

LOL bobsmith111, So sad but yet so true. I don't even want to get into what it takes to get the "TOP" job....

Interesting article. I am considering having my granddaughter process paperwork for me for my part-time business. I never considered this as option, but it is well worth discussing the information with her Mom. Thanks for the heads up.

I wish my parents did this for me in high school lol (or at least I knew how to do it myself..)

@Carol and FMF,

I read relevant Pub 926 sections and my interpretation of the information is different than what is written in the post. In Pub 926, it states the employer does not need to pay employment taxes for employees under 18 that meet the criteria. It does not state the employee does not need to pay SE tax.

When I read the SE tax instructions, the exclusion from SE tax only specifically applies to newspaper carriers and distributors under age 18. I didn't see an exclusion for household workers under 18. (There are also other exclusions, but not related to the article topic.)

My interpretation of the IRS documentation is that employers should hire students under 18 to babysit, which enables the employer to not pay employment taxes (i.e. Social Security and Medicare). However, babysitter employees still need to pay self employment taxes if they make over $400 net self employement earnings.

Please let me know if I misunderstood your article or the IRS publications.

This information is awesome. My 14 year old is CPR certified and wants to babysit. Now I know how to get her set up for some real financial success in the future. Boy is she going to love her mom when it's time to buy a car or house later on!

Reply to Super Saver:IRS Pub 926 applies to employers and does not address employees' taxes. The Social Security and Medicare taxes are employer taxes. The employer can chose to pay it in full on behalf of the employee or withhold a portion from the employee's paycheck.(p. 5). When Pub 926 says the employer does not owe SS & Medicare tax, it means the full 15.3% (both employer and employee portions). See Schedule H or Form 941 for a calculation of how an employer pays 15.3% Social Security and Medicare taxes on their employees.

SE tax applies to self-employed people. A worker is not self-employed if they are a household employee (p. 2 of Pub 926).

A teenage babysitter is either a household employee (and therefore the employer does not have to withhold nor pay SS & Medicare taxes on them) or a self-employed worker. The same wages paid cannot be both household employee wages and self-employment earnings at the same time.

Great idea - but what broker will allow a minor to open a Roth IRA? My broker won't allow a minor to have a retirement account unless they inherit it and have a custodian named on the account.

To Carol and MasterPo: I believe that the IRS actually DOES cross-check IRA contributions with earned income. Your IRA custodian (bank or brokerage) is required to file Form 5498 with the IRS, which states your IRA contributions, including Roth IRAs. If you over-contribute, I would expect to eventually get caught. However, I don't think there is any way that they could check how much money you actually made as a household employee.

I live in california and I babysit my grandkids for money. My son claimed childcare expenses so I have to file my tax return as self employed. Social security administration said my income is not valid since I dont have a license for selfemployed. So irs said my income is not qualify for earned income credit. How should I report my babysit income then?

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