Photo by miggslives at Flickr.com
I just received my IRS newsletter and they offered a tax guide about teens getting summer jobs. I was going to blog about that anyway, so I thought I’d read their guide and use a lot of their points. Here’s the link: http://www.irs.gov/pub/irs-utl/oc_-_may_-_summrjobtips_050211.pdf. If you took a look, you’ll notice that they even set it up for folks like me to copy and paste. Kinda sweet.
But here’s my problem with it, the page says that if you do odd jobs like babysitting or lawn mowing then you have to record that as self employment and pay self employment tax on it. That means that if I hire Alex from across the street to mow my lawn once a week, and I pay him $25 a week for the entire lawn season—that’s 28 weeks where I live, he’ll have earned $700 and, according to that IRS newsletter, he’ll have to pay self employment taxes on that. Normally, a student earning only $700 would pay no taxes at all, but because Alex is self employed, he’d have to pay about $90. Suddenly that lawn mowing job isn’t looking so good.
Let’s call the IRS to the rescue! You see, in IRS publication 926 (yes that sounds awfully dull but ya gotta fight fire with fire) the IRS lists jobs that are considered to be “household workers”. One of those jobs is a yard worker, like Alex. (Babysitter is another one.) What makes a household worker an employee is if the homeowner controls not only what work is done, but how it’s done. For example, I want Alex to mow my lawn on Thursdays. I want the grass shorter in the spring and longer in the summer, and I want him to leave the clippings on my lawn unless it’s really overgrown. Alex doesn’t have a lot of say in this so that makes him an employee.
Why does any of this matter? Because as a household employee, Alex doesn’t have to pay self employment taxes, that would be his employer’s job (that would be me.) But it gets better, since I’m only paying him $700 this year, his wages from me are below the threshold for having to pay social security and medicare taxes so we’ve got a “win/win” situation. As long as the employer pays a person less than $1,700 in a year, then there are no employment taxes. Alex can work and keep his whole $700.
Now here’s the best part of all—Alex is only 16. If you hire a household worker who is under age 18 at any time during 2011, you do not pay employment taxes at all. I could give Alex a raise (please don’t let him read this, okay?) I could also hire him to do some landscaping work in addition to mowing my lawn. Let’s say that I paid Alex $3,000 for work he did in my yard. If he filed a tax return as being self employed, he’d pay almost $400 in self employment taxes for 2011. As my household employee, he pays $0. (I live in Missouri, so if I paid Alex over $1000 per quarter, I would have to pay for unemployment insurance, but that would by my expense, the boss, not the employee.)
So, if you’re looking for summer work and you’re under 18, don’t overlook those old standbys of babysitting and lawn care. And if somebody tries to make you pay self employment taxes, tell them to go read Publication 926. It’s all there in writing. http://www.irs.gov/publications/p926/ar02.html#en_US_publink100086722
Hi Oulo,
Ideally, your grandson should receive a W2 from the employer. Probably won’t get one, but he should. The W2 gives proof of income. Now, he could file a schedule C – even without any W2 – but then he’d have to pay self employment tax – and that’s not a good thing.
So – you want him to get a W2. And really, they’re pretty easy to produce and I’m guessing there’s no social security or medicare in this situation.
So- it’s just fine for him to have a Roth. There’s no need to do a traditional IRA and roll it over, go straight to the Roth. No taxes involved at all. And that’s the way we like it – tax free income tossed into a tax free retirement plan. Pretty awesome!
Question regarding low amount of household income (under $1200/yr) by grandson. If he files a 1040EZ to document the itemized list of tasks/dates to earn this but it’s still to low to be taxed how can he make a Roth contribution from it? Doesn’t it have to be fully taxed to go to a Roth? Wouldn’t he have to go to a traditional IRA then pay tax to transfer to a Roth?
thanks for the interesting article and all the help!
Hi Kendra,
Your son is technically employed by the neighborhood association, therefore, they should issue him a 1099misc, and he would have to pay tax on that as self employed. Of course, he’d write off his expenses of lawn mower maintenance, gas, etc – but I’m guessing that he doesn’t have a lot of expenses there. Sorry, I’m thinking that’s not the answer you want. (But I’m the president of my homeowners’ association so I’d better get this one right or the board will be down my throat!)
Hi, Thanks for your post. My son is 15 and has been mowing our neighborhood park which is owned by all the houses in our neighborhood. He makes about $800 a year. There are some concerns that we are not in compliance as a non-profit regarding payment of services – saying he needs to be either an employee or set himself up as an independent contractor. What is your advice regarding this situation?
Thanks!
Hi Claire,
I’m glad I could help. Although looking back on the post, I need to do some updating.
First – the rules for social security and medicare taxes are the same in Georgia as they are in the rest of the country. Those are federal taxes.
But the threshold for having to pay those taxes in 2018 is no $2,100 for someone over the age of 18.
First just want to say thank you for the great post! This really helped clear up a lot of questions me and my daughter had about earnings she has made while babysitting occasionally. However, we live in Georgia, do these tax laws still apply? Also what is considered below the “threshold” for having to pay social security and medicare taxes in GA? In the above scenario, does this rule only apply to those under 18? or if a person in the same situation who is over 18 would these rules still apply? Thank You!
Hi Jeremy,
Technically, I would think that if your son was working for a number of neighbors, that his income could be considered to be self employment and that he would have to pay self employment tax. But if he’s just working for one or two families, then I’m still leaning towards household employee.
I would report the wages on a 1040, just to have documentation of the wages for the ROTH. Put that on line 1 of the 1040EZ. Keep the records so you’ve got the documentation.
Hi Jan,
This question is similar to some of the below but varies slightly.
My son was 13-14 when he started mowing some neighbors lawns. He made a total of ~$800 for 2017.
We opened a ROTH for him and he deposited $775 of those earnings.
If he is considered a household employee, does he still need to file a tax return? If not, great.
If so, is it considered Self-employment which would then render the household employee designation invalid?
We kept records of all transactions (date of service, date of payment, etc…) so would this suffice if we ever got audited?
Thank you.
Hi Mark,
You’re absolutely right! Alex could invest that money into a Roth IRA and the compound growth would be remarkable! I like how you think!. A great place to start with an IRA is the MyRA site. It’s free.
So then could Alex invest that money into a Roth iRA? THat would be amazing if so. The compound growth over decades would be remarkable.
Hi Meloop,
If you pay self employment tax with your 1040 tax return, that is your social security and medicare tax. I don’t know what’s up with your CPA.
Hi Janae,
I would say that your son should move into my neighborhood! Oh wait, that’s not the question. Sorry.
Since he’s already got a lawn business, these other jobs really sound like an extension of the lawn care business. Technically, all income should be reported on his tax return. I would even go so far as to include these other jobs as part of his self employment income.
Hi Ken,
In my opinion, Jane does not need to file taxes. I would count her feeding the elderly gentleman at the assisted living facility to still be “household employment.” The man lives at the facility and she is feeding him at his household. I think that fits the parameters of a household employee and therefore there’s no need to declare that as self employment. That means her income is below the filing threshold so no tax return for her. (Unless, of course you want to put money into a Roth IRA for her – then you’d want to file a tax return just to prove the income.)
Hi Russ,
Great question! Here’s my opinion on that. Although I’ve never heard of a “Roth IRA audit” you are better off dotting your i’s and crossing your t’s to be on the safe side. I would issue a W2 and file a tax return. Here’s why:
1. It creates a paper trail that proves the work and the income. All done!
2. If you don’t – and for some reason there is an audit, you have too problems:
A. There is a Roth IRA with no earned income which would be subject to a penalty of 6% per year the funds are in the account.
B. Since there is no W2 or tax return, the IRS could determine the income to be “self employment” instead and tax the money at 15.3% Plus penalties and interest for non-filing and late payment of taxes.
So – get yourself an EIN number and give your daughter a W2. It’s a little bit of a hassle now, but this is one of the ounce of prevention things that is probably worth it.
A CPA told me that he could not (i could not) pay my social security taxes with my income taxes as Social Security and Internal revenue are separate.
Is this true? Or do I need to pay a different part of IRS or use a different form for money I earned as a housekeeper? I asm confused that a professional would no be able to give me an answer. . .
Thanks for this post. My son runs a lawn business, uses his own equipment, has several clients, etc so from this it sounds like he should file a schedule C as i expected. However, he also is hired often by our neighbors on the street for odd jobs here and there (clean out gutters, paint, pull weeds, whatever). Does he need to report those earnings somewhere on his tax return? It sounds like those would qualify as a household worker and should not be included in his self-employment income. Just trying to figure out if they would go under other income or simply not be listed since they are under the $6300 limit for earned income.
Thanks for this very helpful information on what must be a common but confusing situation.
Last year (2016) my daughter, who turned 18 in late October, earned $430 from mowing a neighbor’s lawn and $448 from helping feed an elderly gentleman in an assisted living facility on weekends. She earned most of her income in 2016 before she turned 18, but some of it was after she turned 18.
Based on this blog post and Pub 926, I’m assuming she won’t need to report the $430 from lawn mowing. The feeding job is less certain to me, but it’s similar to baby sitting.
Details on the feeding job: A friend of ours (we’ll call her Sue) asked my daughter (we’ll call her Jane) to help out by transferring and feeding Sue’s father a couple of times a week in an assisted living facility. Sue is paying Jane privately by check. There’s no W-2 or 1099 involved. It’s a completely private arrangement, and Sue is giving the directives. There was no formal training involved. Jane is not bringing any food or equipment to the job; everything she needs to do her job is provided.
Does Jane need to file taxes at all? If so, will she be required to pay self-employment taxes?
Thanks for this very helpful information on what must be a common but confusing situation.
Last year (2016) my daughter earned $430 from mowing a neighbor’s lawn and $448 from helping feed an elderly gentleman in an assisted living facility on weekends.
Based on this blog post and Pub 926, I’m assuming she won’t need to report the $430 from lawn mowing. The feeding job is less certain to me, but it’s similar to baby sitting.
Details on the feeding job: A friend of ours (we’ll call her Sue) asked my daughter (we’ll call her Jane) to help out by transferring and feeding Sue’s father a couple of times a week in an assisted living facility. Sue is paying Jane privately by check. There’s no W-2 or 1099 involved. It’s a completely private arrangement, and the Sue is giving the directives. There was no formal training involved.
Does Jane need to file taxes at all?
Hi Jan, first off thanks for posting this, and I had a clarification question. I would like to start a roth for my daughter who is under 15 and lives with me. I understand she must have earned income, and she is working for me as a household worker.
1) Do I need to report her income, do a tax return, or document anything if she makes under the earned income limit ($6,300) for cutting my lawn, shredding documents, etc. (I know I need to keep details of the work and money paid, but other than my own records, do I or her need to report it)
2) I understand that since she is my daughter and if she makes more than $2,000, I don’t need to pay federal unemployment tax, or withhold any social security and Medicare taxes, because she is my child.
3) So, if I pay her $5,500 as a household worker, and she contributes to her Roth for $5,500, do I need to tell the IRS anything, or just keep my own records for her income. (To clarify the earned income would be from me and not from a job, so no w2 was issued or created)
Thanks for your help,
Russ
Hi Steve,
Since your daughter was working at a yoga studio, she’s not considered to be household help so she will need to file and pay taxes on that income. If she has not other income, then I think her income is low enough to not have to pay federal income tax, just the self employment tax.
My daughter babysits at a yoga studio for clients who bring their children to be watched while they(parents) are taking a class. She received a 1099 MISC from the yoga studio, showing box 7 as earned 1,459. Is she considered a household employee by definition of “babysitting” thus exempt from paying any taxes or should she be paying SE taxes? Would she also have to pay federal taxes or just the SE? Thank you!
Hi Scott,
Technically, a person is required to report all the income he or she earns to the IRS – whether medicare is owed or not.
This is several years old, but in the current 926, on page 11, it says “If you’re not required to file a Form W-2, we encourage you to provide your household employee with at receipt for services…This receipt will help the household employee to report his or her wages on Form 1040.” The only case I can find for not requiring a W-2 is where income is under the limit (now $2000). If sounds like the household employee needs to report the income even if he doesn’t owe Medicare tax on these wages.
Hi Jesse,
You are probably “self employed”. You should probably report all of your income, and write off all of your expenses on a schedule C – and you may be subject to self employment tax. The difference here between you and a household employee is that you do the work for a “few” lawns. You also have your own mower instead of using the homeowner’s equipment. Sorry.
I live upstate new York and i’m older then 18 and I have my own mower and mow few of my friends lawn the way they like it cut. I made about a thousand from each of my friends for the during the summer. I already work at a job during the school year which start in September to middle of June. So am I household employee or not?
Hi Nancy,
Right. In this case, he would not be a household employee.
If the teenager works for a lawn mowing company and gets paid as an independent contractor, however, he would be subject to self employment tax per the usual rules. In such a case, there is no household employee relationship between the teenager and the multiple homeowners whose lawns he mows. Whether he should be paid as an independent contractor is another discussion.
Hi Rachael,
Technically, you should report the $1000 that you earn.
What about an adult over 18 who mows a few yards during the summer and makes maybe $1000 annually? Can they get into trouble for not reporting those earnings? Thanks.
Hi Dawn,
Yep, real blog, real people. And yes, the IRS publication 926 is also real. And yep, I read all those IRS things about how you have to file for self employment for over $400 also. (Yes, that’s true–except, in the circumstance of being a household worker.) That’s why I wrote the post.
This post is from a few years ago, but as I read the Publication for 2014, the rules are basically the same with higher limits…… Does this all mean you have to do nothing – no reporting by either party? The kid earning under $1900 from you and your neighbors doesn’t have to file any tax forms whatsoever and you don’t have to report that you paid him? So many websites say that if a kid earns over $400 mowing lawns or babysitting, they have to file as self employed. How are they missing this? I have been sitting here incredulous that my son would have to pay over $100 for making $1500, but this really sounds like we don’t have to do anything. I hope this is still a live blog and I get a response!!!