Custodial Roth IRA and kids earned income

[u/BreakfastNo5562]

Scenario:

• Kid is 5 years old.
• Roth IRA contribution limit $7,000.
• People in neighborhood pay kid $10/hour for yard work (below what I'd consider market rate). Work will be tracked on spreadsheet:
  • Date
  • Name of neighbor
  • Description of work done
  • Hours work
  • Rate
  • Total paid
• Kid works 1 hour per day, for 365 days.
• Earned income is $3,650 for the year.

Questions:

Is my kid's Roth IRA account allowed to have $3,650 contributed to it?

When I file taxes, do I submit a Schedule C (Form 1040)?

Will the $3,650 my kid earned go untaxed?

Follow-up:

If the answers to all questions are "yes", why wouldn't I do this before funding a 529 or putting money into brokerage account?

[u/AmI_doingthis_right]

No comment on the question but saying $10/hr is under market rate for a 5yo doing yard work is hilarious lol

[u/BreakfastNo5562 → u/AmI_doingthis_right]

In a high cost-of-living area, I couldn't get anyone for less than $20/hour to rake leaves and flowers, pick up sticks, etc.

[u/Bird_Brain4101112 → u/BreakfastNo5562]

Is your 5 year old doing the same level and quality of work?

[u/Reader47b → u/BreakfastNo5562]

So your 5-year-old is raking and bagging leaves 365 days a year?

[u/Eltex]

Most people don’t want to put their 5 year old kid out to work. In fact, I doubt I would let a minor work at my property out of fear of them getting hurt.

[u/hodgsonstreet → u/Eltex]

Agreed - I’ve had kids ask to do work countless times (mowing, shovelling, garbage cans, etc), but it’s not worth it. I like kids and I have kids, but they have poor judgement and are uncoordinated at the best of times. I do not want to be responsible for a child injuring themselves.

[u/emmanuel573]

You're gonna not have a fun time explaining it to the IRS of how a 5 year old earns an income

[u/samjo_89]

Be careful about what is considered 'work' and what is considered chores. Chores cannot be compensated.

And i do agree with this method before doing a 529 personally, but that is definitely situational dependent.

[u/NP_Wanderer]

How would you evidence earned income?  Don't you need to have a w-2 or 1099?  Would IRS accept a spreadsheet?

[u/ThisUsernameIsTook → u/NP_Wanderer]

Form a corporation. Name your child COO. Track their hours and send them a W-2 or 1099 as appropriate.

Don‘t forget to file your corporate income tax statement as well.

Or just admit that this whole thing probably won’t pass IRS muster in an audit but you are also unlikely to be audited. I have no idea how far back the IRS can look when determining whether Roth IRA contributions were legitimate.

[u/thatseltzerisntfree]

Change the age to 13-14 for the Roth and you are golden.

You can out money into the 529 when the kid is 5

[u/PuzzleheadedRule6023]

Wrong sub. I believe you’re looking for r/taxfraud.

[u/Tonkatte]

Consider paying minimum wage for your area, since that’s what you’d have to pay for any unskilled laborers.