taxes

Babysitting and Taxes

Does your working child owe self-employment tax on his or her earnings? Plus, find out the rules for contributing to a kid's Roth IRA.

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.

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.

Most Popular

The Best Stocks for a Bear Market
stocks to buy

The Best Stocks for a Bear Market

The ideal bear-market stock pick should have a defensive business, a long history of dividend growth and relatively low volatility. Here are 10 stocks…
May 18, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
15 Stocks Warren Buffett Is Buying (And 7 He's Selling)
stocks

15 Stocks Warren Buffett Is Buying (And 7 He's Selling)

Berkshire Hathaway CEO Warren Buffett is a bull once more! The Oracle and his team entered eight new positions and added to others in a big way.
May 17, 2022

Recommended

Charitable Tax Deductions: An Additional Reward for the Gift of Giving
Tax Breaks

Charitable Tax Deductions: An Additional Reward for the Gift of Giving

With a charitable tax deduction, you can donate to a good cause and cut your tax bill at the same time.
May 19, 2022
No Tax for Donating Leave to Ukraine Victims
Tax Breaks

No Tax for Donating Leave to Ukraine Victims

Vacation, sick, or personal leave donated to help victims of the Russian invasion of Ukraine won't be treated as taxable income.
May 19, 2022
Will a Gas Tax Holiday or Suspension Lower Gas Prices Near You?
Tax Breaks

Will a Gas Tax Holiday or Suspension Lower Gas Prices Near You?

One way to bring down the price of gasoline is to establish a gas tax holiday. But will Uncle Sam, or your state government, suspend the gas taxes tha…
May 18, 2022
10 States With the Highest Sales Taxes
state tax

10 States With the Highest Sales Taxes

When both state and local taxes are considered, you'll pay more sales tax when shopping in these states.
May 17, 2022