Child mowing lawns in the neighborhood

I have two children who are working mowing yards, painting house numbers on curbs, and other general yard work. This is in addition to about $1000 a year that get in unearned income from a trust.

Now, the advice I get from the general public is to ignore everything thing they do, the IRS will not find out, or really care. I assume most kids mowing lawns in the summer will not make enough for anyone to worry about, but I think their trust fund may easily put them over the limt.

I'd like to start a Roth IRA for both of them. I would certainly declare their income on tax returns. My question is, do I also need to start declaring and paying social security? This seems to be getting very complicated for two young kids mowing yards.
:(

DJB,

Yes, the general public is partially wrong, the IRS does care.

A dependent child must file a tax return when one or more of these apply:
- Your unearned income was over $750.
- Your earned income was over $4750.
- Your gross income was more than the larger of -
$750 or
Your earned income up to $4,500 plus 250 dollars.

The $1,000 from the trust fund puts them into the category of filing.

The 2 dependents would need to report their earned income as self employed. Because 2 people can not be self employed in the same business (one is the employer and the other is the employee) they would need to file separate Schedule C's. They could equally split the income and expenseses. Self Employment taxes would need to be paid when the profit from the self employment exceeds $400, in this case for each dependent.

You would not need to pay the self employment tax until you file the tax return.

The earned income would qualify them for a ROTH IRA.

Let's see what others have to say!

Thanks for the reply. You have me a little confused.
Let's take the trust fund out of the picture. Now its just kids going out and mowing yards.
To be legal - they would need to pay self-employment tax after they make $400.
But - they don't have to file until they reach $4750.

I think at best they each made $1000 - $1500.
They don't work together, at all, so I do consider they to be self-employed.
I believe I can file a trust tax return, and they do not have to declare it as their income at all.

I'd like to put all of their earnings into a Roth IRA.
So, if I have a 13 year old who makes $1000, I can put $100 into a Roth IRA.
He's over the $400 self employed limit, but under the $4750 income limit.
What paperwork do I need to do to make the governmnet happy?

Thanks for your time.

DJB,

I see the confusion. I stated the IRS requirements without giving enough thought to the situation.

Because they have self employed income, they would need to file, and at $1,000 of income they would need to pay self employment tax. They would not have any income tax to pay, because of the $4,850 standard deduction (2004 single filer), the taxable income will be zero. They will not claim themselves as an exemption. You will claim them as a dependent.

Use a Schedule C or C-EZ for their business. They can deduct their business expenses, gasoline, oil, paint, hand tools they may have purchased, gloves, googles, ear protectors etc. and a deduction for the miles you have hauled them to do the work. The schedule C will also lead you to Schedule SE where the self employment tax is calculated. They will also need to file a form 1040 where the business income is reported on line 12, and half of the self employment tax on line 28.

The entire profit from their business can be contributed to their IRA.
At least ask the child to match your $100, making the entire contribution $200.
most IRA trustees will have a minimum contribution.