Babysitting and Taxes

My daughter will be able to open a Roth IRA this year with money she earns from babysitting over the summer. Does she need to pay the self-employment tax, which would eat up 15.3% of her income?

No, your daughter does not have to pay the self-employment tax. Ordinarily, individuals must pay the tax if their net earnings from self-employment are $400 or more. But there are special exceptions for kids.

In your daughter's case, teenage babysitters are normally considered employees, so they are exempt from paying self-employment tax. There's also a specific exemption for newspaper carriers under age 18.

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If a child under 18 is working part-time as a household worker (this means babysitters, gardeners, people who do housecleaning or repair work, or anyone who is employed in or around someone else's home), he or she is also exempt from the Social Security tax.

Children under 18 who work in their parent's unincorporated business are also exempt from the Social Security tax.

For more on kids and work, see Tips for Landing a Summer Job and Young Kids Can Earn Money Too.

Funding a kid's Roth IRA

We'd like to open a Roth IRA for our 15-year-old, who will earn about $1,600 this year working for a tutoring company. Since the maximum IRA contribution is $4,000, can we kick in more money to bring her up to $4,000?

Nice idea, Mom and Dad, but the answer is no. In 2007 your child can make an IRA contribution up to $4,000 or 100% of her earned income, whichever is less. In your daughter's case, that would be $1,600.

You'll probably want her to use some of her earnings for spending money, or to save in a regular bank account. So you could kick in your own money to open the IRA -- as long as you don't exceed your daughter's actual earned income. See IRA Rules for Kids to learn more.

Where to open an IRA

I'd like to help my 16-year-old grandson start a Roth IRA with his summer earnings. But will investment companies open IRAs for minors? If so, will they accept just a few hundred dollars?

Policies vary, but in general you should have no trouble finding a company willing to take your grandson's money.

The list of financial firms willing to open IRAs for minors includes brokers Charles Schwab, E*Trade, Muriel Siebert, Scottrade and TD Ameritrade, plus mutual-fund families American Century, T. Rowe Price and Vanguard. Also on the list: Bank of America, Citibank and PNC.

Minimum investments vary. Schwab, for example, will open a kid's IRA with as little as $100; TD Ameritrade and Muriel Siebert have no minimums. At American Century and Vanguard, the minimum is the same as the fund's minimum investment.

Janet Bodnar is editor-at-large of Kiplinger's Personal Finance, a position she assumed after retiring as editor of the magazine after eight years at the helm. She is a nationally recognized expert on the subjects of women and money, children's and family finances, and financial literacy. She is the author of two books, Money Smart Women and Raising Money Smart Kids. As editor-at-large, she writes two popular columns for Kiplinger, "Money Smart Women" and "Living in Retirement." Bodnar is a graduate of St. Bonaventure University and is a member of its Board of Trustees. She received her master's degree from Columbia University, where she was also a Knight-Bagehot Fellow in Business and Economics Journalism.