Suppose your kid (8 years old) decided to set up a neighborhood lemonade stand and by some freak occurrence managed to somehow make about $3,000. How does one manage the tax liability on that income? Is it counted toward the parents' income?

  • @HartCO is talking about hobby loss rules. If you have a loss on Sch C be sure to check out hrblock.com/tax-center/income/other-income/hobby-loss-rules – D_Bester Aug 13 at 20:09
  • It is a hobby I suppose. She's not really even intending to sell the things she makes. Just does if they sell on ebay. Otherwise they sit in a huge bin. She is nowhere near loss though. Also, we're not looking to avoid self employment tax. Just I think it is irresponsible to file that way if it is not technically required. It's a pretty big percentage that could otherwise be re-invested or put aside for anything else in her future. – Kai Qing Aug 13 at 21:12
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    @KaiQing a hobby in the legal sense is probably different than in the common sense. In the end, selling stuff “whenever someone buys it“ is like the definition of a business ;) – DonQuiKong Aug 14 at 10:53
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    At 13 I was filing 1040 EZ claiming zero exemptions because my parents still had me as a dependent. Pretty sure I've filed a return every year since then. Filing 1040 EZ as a child definitely helped me get my feet wet on tax returns in an easy way. – Todd Wilcox Aug 14 at 13:58
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    @ToddWilcox - what were you filing for? Did you make money on your own or did you file just for the fun of filing? Like that kid in the breakfast club who has a fake ID to vote – Kai Qing Aug 14 at 16:25
up vote 67 down vote accepted

Operating a lemonade stand would count as self-employment, and if they earned more than $400 they would be required to file a tax return. In this case, the income is too low for there to be any income tax obligation, only a filing requirement due to self-employment income. The tax return would be theirs, but the parents would still claim the child as a dependent. If they are unable to file, the parents would file on their behalf, but it's still a return in their name, the income is not combined into their parents tax return.

Edit:
Even though the question is in the context of earned income, it's important to note that unearned income (think passive income like interest/dividends) has separate rules and depending on the amounts can be included on the parents' return, or a portion of it can be taxed at the parents' tax rate even if filing a separate return for the child.

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    Ok good to know. So even though they are a child, once the income meets the threshold where there is a tax obligation, the filing is done on behalf of the child, and not in combination with the parents. – Kai Qing Aug 13 at 17:03
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    I'm using lemonade stand to make it universally understood in dynamics. The reality is she is selling things online of multiple varieties and could stand to make far more than $3k (sorry, this was in response to a now deleted comment) – Kai Qing Aug 13 at 17:22
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    @DonQuiKong In the US there's not much fuss to having a business in the eyes of the IRS, most of the time there's no need to register the business with the government, you just report the business income to the IRS. Buying and selling on ebay is a common small business model, it's not typically considered a hobby if there's a profit-motive. – Hart CO Aug 13 at 21:36
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    @0x499602D2 Because that's tax evasion, unlikely to get caught for $3k, but the IRS catches people with some frequency. – Hart CO Aug 14 at 0:49
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    @0x499602D2 They typically catch people when it's larger sums, and they buy expensive things but show little or no income, things like that. Or if there's a newspaper article about her successful little business the IRS takes notice, stuff like that, not super common, but it does happen. – Hart CO Aug 14 at 3:55

This actually happened to my brother. Started a Minecraft server at the age of 14 which became massive and netted him about 100k through donations in a year. He had to file it as personal income (my parents obviously helped him do it) and pay taxes on it himself.

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    That's awesome. Do you know if he filed it as earned or unearned income? I'm not sure how donations work per say. – Kai Qing Aug 13 at 22:51
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    I believe he filed it as earned income. Eventually he got it filed as an LLC and payed himself a salary through it to prevent liability issues. – TheSaint321 Aug 13 at 23:56
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    LLC: Smart move! (And probably worth editing in to the answer.) – Martin Bonner Aug 14 at 12:11
  • Note that in most states, a single-member LLC doesn't actually provide any legal liability protection. It can help the tax treatment substantially, though, if filing taxes as an S-corp, and most of the profit as not treated as a wage. – Phil Miller Aug 15 at 19:35

After the clarifications to the question, noting that this is a child selling things on eBay, I'd be a bit more cautious about the tax implications.

In particular, eBay does not allow users under 18 to have accounts:

Because listings on eBay involve entering into a contract, we require all our members to be aged 18 years or older.

As such, it's possible that you, not your child, would be the one earning the income from the sales (see this article for example). That's not to say you couldn't arrange to "buy" the products from your child at full cost, minus shipping, or somesuch, but it's something to be aware of.

That aside, if a child does have earned income, that income would be reported just as any other income, assuming it's sufficient to require filling (> $6k).

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    And once again I'm taken way too literally. Let me just clarify for everyone I will not in any way expose what she is actually doing because I don't want anyone else to jump on the bandwagon. Simple as that. She does not have any accounts on third party sites. She does not have a card processing account. She doesn't even have an email address. Let's just focus on the abstract - does a child file on their own, or jointly with their parents – Kai Qing Aug 14 at 16:22
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    But good point about > $6k. That's a good general idea to note the thresholds since looking things up all the time isn't motivating – Kai Qing Aug 14 at 16:23
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    @KaiQing I think the point here is that it's not a direct straightforward answer. The particular situation will determine. Ordinary earned income is filed as a child. Ordinary unearned income is filed essentially as the parent (not exactly the same, but it ends up being taxed similarly, to avoid parents gifting large amounts to avoid/lower taxes). But whether something is earned or unearned is complicated when it's not just a normal job or a normal investment. – Joe Aug 14 at 16:26
  • Privacy concerns are totally understandable re: posting the exact details here; but if she's doing something on the order of a business, you should at least talk to a tax accountant including the small details to make sure you do it properly. – Joe Aug 14 at 16:27
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    Note that the >6k threshold mentioned here is separate from the self-employment filing threshold of $400. So many rules to follow. – Hart CO Aug 14 at 21:45

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