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I found this question looking for suggestions on ways that children can earn money, but I want to know what rules there are surrounding payments I can make to my child without getting the IRS on my case. I will still likely gift the donations to the Roth IRA. What rules are there for earned income for children that comes from their parents?

Here is a link to one opinion I found online:

http://fairmark.com/retirement/roth-accounts/contributions-to-roth-accounts/roth-iras-for-minors/

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Very grey area. You can't pay them to run errands, mow the lawn, etc. I'd suggest that you would have to have self employment income (i.e. your own business) for you to justify the deduction. And then the work itself needs to be applicable to the business.

I've commented here and elsewhere that I jumped on this when my daughter at age 12 started to have income from babysitting. I told her that in exchange for her taking the time to keep a notebook, listing the family paying her, the date, and amount paid, I'd make a deposit to a Roth IRA for her.

I've approaches taxes each year in a way that would be audit-compliant, i.e. a paper trail that covers any and all deductions, donations, etc. In the real world, the IRS isn't likely to audit someone for that Roth deposit, as there's little for them to recover.

  • $5000 now could be $500,000 at retirement for a 5 year old, but I don't think I would be that aggressive. A few hundred dollars from a summer car wash business would not seem egregious. I want to establish a habit of saving and an opportunity to watch investments grow more than anything here. – NL - Apologize to Monica Feb 16 '17 at 19:37
  • The going rate was $10/hr, not tough to get to $2000 over the year. – JTP - Apologise to Monica Feb 16 '17 at 20:05
  • Yes, but my daughter is still the one being babysat, not doing the babysitting. :) – NL - Apologize to Monica Feb 16 '17 at 20:07

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