How to claim a minor's income?

Question

When a child earns money babysitting or doing yardwork for neighbors, it's common to ignore claiming the income, as income earned by the minor has its own deduction, and would likely not generate any tax due. But - in order to open a Roth IRA, the minor has to claim legitimate earned income. Those who pay $10-$20 cash for this, are not going to issue a 1099 or W2, the amount is too low to worry about the Nanny Tax issues. Where exactly do you claim such income on the child's return? I can't imagine a Sch C is required.

Answer 1

I don't think the income you're referring to would be considered W-2 employment income. If it were, then your neighbors would've been considered the employer(s), and would've needed to issue the W-2(s) to the child. I imagine they would've also been liable for withholding taxes and deductions in that case.

Rather, it sounds like the income you're referring to is self-employment income ... the enterprising child simply took advantage of a business opportunity to deliver a needed service! This would be the case especially if they had multiple neighbors for which they were providing a service or the service weren't regular (employment-like) in nature.

So, viewing the income that way – as from a business – it should be reported as self-employment income on Form 1040 (PDF) line 12, "Business income or (loss)", with a corresponding 1040 Schedule C (PDF), "Profit or Loss From Business", or 1040 Schedule C-EZ (PDF) (abbreviated).

Here's something relevant from the IRS, Publication 17 (PDF), within Section 5 on "Wages, Salaries, and Other Earnings" under "Employee Compensation":

Childcare providers. If you provide childcare, either in the child's home or in your home or other place of business, the pay you receive must be included in your income. If you are not an employee, you are probably self-employed and must include payments for your services on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. You generally are not an employee unless you are subject to the will and control of the person who employs you as to what you are to do and how you are to do it.

Babysitting. If you babysit for relatives or neighborhood children, whether on a regular basis or only periodically, the rules for childcare providers apply to you.

Of course, if you actually file the income as self-employment income, it may be subject to Self-Employment Tax, i.e. Social Security, Medicare (part of which would have been the employer's responsibility if it were W-2 employment income instead.) Self-employment taxes would be calculated on 1040 Schedule SE (PDF).

Note from the Self-Employment Tax link: "The SE tax rules apply no matter how old you are [...]"
But also:

You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies.
- Your net earnings from self-employment (excluding church employee income) were $400 or more.
- You had church employee income of $108.28 or more.

So ... as long as the net earnings are less than $400, there ought not to be any self-employment tax, if I'm reading correctly.

Disclaimer: I am neither an accountant nor a tax lawyer. Consider consulting a professional.