Full time college student Roth IRA, W-2 & non W-2 income for funding question

catch22

This question comes from my "neighbor chat"; being questions from those I know, who know I have some of my curiosity inside the investing related world.

The circumstance:
--- 1. Full time college teen with part-time job income and reported to the IRS via a W-2 wage/tax statement.
--- 2. Other income (mostly mowing lawns/related yard work); being self-employed and paid with cash, not part of an established business having a FED tax ID number, nor a W-2. No income to be reported (IRS) for this work.

For ease of simple calculations, I'll use $1,000 each (quite close) for the above work.

The question: How much may be contributed to the Roth IRA for 2019?

My observations and suggestions to the question of Roth IRA funding amounts. Obviously, the W-2 income in box 1 qualifies for the Roth contribution. I also suggested the $1,000 from self employment*** be contributed, in full, to the Roth.
For the self employment dollars, I further suggested that a document be constructed listing the dates and amounts of payment for this work; and that this document be kept in paper or electronic form and kept with all other documents related to the Roth IRA account.

***self employment income qualifies for Roth IRA contributions; but in this case, the individual doesn't have enough combined income to require filing a tax return. Note: only Medicare and SS was withheld for the W-2 work, not Fed. tax was withheld.

This statement is a fairly common overview from respected mutual fund companies and other private sites regarding self-employment and Roth IRA contributions:

--- The pay received must be legitimate and at the going market rate. Parents, for example, cannot pay their kids $1,000 an hour to mow the lawn and call it earned income. Ideally, the contributor will receive a W-2 to substantiate their earnings. Otherwise, it’s a good idea to keep excellent records from odd jobs that do not provide a W-2.

IRS Pub. 590-A For reference.

Likely, I've overlooked or misunderstood something with this topic.

Thank you in advance for your thoughts.
Regards,
Catch

msf

" I also suggested the $1,000 from self employment*** be contributed ...
***self employment income qualifies for Roth IRA contributions; but in this case, the individual doesn't have enough combined income to require filing a tax return."

One must file a tax return for self-employed income above $400 (though you don't necessarily need a separate EIN). So this income has to be declared (and self-employment taxes paid). Whatever is left over after taking out business expenses (including the employer-side half of the SE taxes) can be contributed to an IRA.

IRS, Tips for teenage taxpayers starting a summer job

Students who do odd jobs over the summer to make extra cash – like baby-sitting or lawn care – are considered self-employed. They should remember that money earned from self-employment is taxable

IRS, Self-Employed Individuals Tax Center

You have to file an income tax return if your net earnings from self-employment were $400 or more. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 instructions (PDF).

catch22

Hi @msf
Thank you for the head slap ! And in particular, the excellent internal IRS links. I didn't work as hard as I should have.

When I posted, I was sitting and pondering the combined income (being too low) to require filing at all. Duh, me; not separating the "self" monies.
The full time student (age 20) I'm sure will qualify as a dependent with the parents 1040; as they provide full support. I'm going to look further into this and perhaps Form 8814 regarding qualifiers; which appears to perhaps allow the self employment income to be co-mingled with the parents income filing.

Tax regs/rules remain "fun".

I recall in the 1990's and portions of the 2000's when I was allowed to opt to use my own vehicle or a company provided vehicle. The personal vehicle use portion qualified as, and had to be accounted for as a use of\by an "independent contractor". I always kept immaculate records, of course; and then had to move the math into Form 2106.

Much less work at this house now for the tax side. It has become how much "in", "no" you don't have enough deductions anymore, and this is what you "owe". Getting close to that postcard size 1040.

Sincerely and respectfully,
Catch

Sven

@msf, Great suggestion. Good way to start Roth IRA if they can afford to them aside. Generally young folks don't earn enough to contribute.

msf

Thanks, but it was catch's neighbor looking into this. Still, I agree with you (and catch) that this is a good way to start. Especially for a student with some side income that is too low to be taxed at all.

catch22

Hi @Sven
I've been an advocate of Roth IRA's for the young one's, including minor children. I "bother" friends and family every 6 months with email "reminders". The neighbor recalled a conversation. In particular, I emphasize the long term compounding of the money; helping to create a saving and investing habit and education in the young minds. A few have taken advantage and set up accounts.

This Saving and Investing calculator is what I pass along right now. It contains numbers I've preset for an example of money growth over time without a large input amount, but they may be set to whatever. Also, scroll below the graphic to read more information about the graph.

Also, Sven; you noted that " Generally young folks don't earn enough to contribute."
>>>They don't need much; as with Fidelity now having ZERO $ minimums for equity investments. Prior to this, one could at least park money in a MM account,

Lastly, this is more info from 2017; directed towards minor Roth IRA's, but covers some of the same ground.

Take care,
Catch

Sven

@catch22 and @msf, You two are the real champs to teach young ones about money. Starting early is the key to compound growth over time.