Roth IRA for children

[Guest magcpa]

Does anyone know of any IRS case law for a business-owner/parent putting their young child on the books to legimately earn income for the purpose of starting a Roth IRA. What's the youngest age the child can be? Exclude the model/actor child.

[John G]

Case law?

I can't answer that part, perhaps our trusty accountants can weigh in.

Experience?

I have done this myself for my two girls. I have known others to do it as well. Outside of modeling, you are looking at the level of compensation vs what kind of contribution could be made. If you are talking of just $500, you can use an educational IRA and avoid the probelm entirely. If you are talking more money each year, then you have a greater burden.

Filing, shredding, sweeping, decorating, fetching stock, serving Christmas refreshments, loading the cash register (something I did for my mom at age 6 with her bakery), copying, etc. Most of these functions could be done by a teenager. To hit the max of $3,000 you may be talking an average of 10 hours a week at something slightly over minimum wage. These are rarely functions someone under the age of 12 could do well. I think you would have a hard time convincing the tax court that a 5 year old could earn $3k. It would be pretty easy to defend that with a teenager. You should understand that you have to go through all the formalities of having a payroll with SSN and withholding to best support your case. You might need some time records to support your compensation. You are unlikely to be challenged when the arrangement appears sensible, but you should be prepared anyway.

Remember that their are other methods of starting a tax shelter - such as the 529 and college prepay plans that do not hinge on "earned income".

[mbozek]

State labor laws may restrict the type of work which may be performed by minors. Some states restrict employment by persons less than 15 or 16 to a certin number of hours and/or occupations. Failure to comply with state laws could lead the IRS to disallow payment to child as a business expense for wages.

[John G]

Mbozek, you are correct that there may laws limiting child employment. However, many states exempt or relax the rules for family owned businesses, which is what is likely to apply here.

DH - a 5 year old working a paper shredder? I guess you would not take the warnings from shredder manufacturer to keeping curious children away from dangerous equipment. You said you are not a parent. I recommend that you do not offer advice in areas where you have no experience.

[mbozek]

John: I would be interested in knowing what states exempt employment of minors who work in a family business. NY has strict rules on employment of minors even in family businesses to prevent their exploitation (See sect 130-144 of NY labor law) and provides that employment of minors is only permitted when such employment does not violate the requirements for attendance under the state education law. While it is an audit issue I dont think the IRS will consider employment of a 5 year old as custodian to be anything more than a no show job.

[John G]

Mbozek - I talked with some Colorado labor dept staffers this morning. They said that in Colorado, there are no minimum ages or hours for children working in family businesses, however the rules for hazardous occupations did apply. You will find 8-12-104 on Exemptions in the following part of Co Revised Ttatutues, Title 8, article 12 will give the details. This may have come from the historic agricultural roots of this state... generally Colorado has relaxed rules on many business issues.

www.coworkforce.com/LAB/ColoYouthOpportunityAct.pdf'>http://www.coworkforce.com/LAB/ColoYouthOp...ortunityAct.pdf

Special Note to DH - You have made multiple long posts that have been often off topic, not in keeping with the tone of this message board, sometimes inaccurate, and frequently not based upon any expertise, I have stepped in as one of the moderators of this board and deleted these messages from this thread. This is a step that I have only had to take with one other author in the past three years. You have ignored my suggestions about your posts. Please restrict your posts to the posted topic and areas where you have knowledge or experience.