48

Suppose your kid (8 years old) decided to set up a neighborhood lemonade stand and by some freak occurrence managed to somehow make about $3,000. How does one manage the tax liability on that income? Is it counted toward the parents' income?

JTP - Apologise to Monica
  • 172,273
  • 34
  • 296
  • 560
Kai Qing
  • 1,217
  • 1
  • 7
  • 11
  • @HartCO is talking about hobby loss rules. If you have a loss on Sch C be sure to check out https://www.hrblock.com/tax-center/income/other-income/hobby-loss-rules/ – D_Bester Aug 13 '18 at 20:09
  • It is a hobby I suppose. She's not really even intending to sell the things she makes. Just does if they sell on ebay. Otherwise they sit in a huge bin. She is nowhere near loss though. Also, we're not looking to avoid self employment tax. Just I think it is irresponsible to file that way if it is not technically required. It's a pretty big percentage that could otherwise be re-invested or put aside for anything else in her future. – Kai Qing Aug 13 '18 at 21:12
  • 1
    @KaiQing a hobby in the legal sense is probably different than in the common sense. In the end, selling stuff “whenever someone buys it“ is like the definition of a business ;) – DonQuiKong Aug 14 '18 at 10:53
  • 2
    At 13 I was filing 1040 EZ claiming zero exemptions because my parents still had me as a dependent. Pretty sure I've filed a return every year since then. Filing 1040 EZ as a child definitely helped me get my feet wet on tax returns in an easy way. – Todd Wilcox Aug 14 '18 at 13:58
  • 1
    @ToddWilcox - what were you filing for? Did you make money on your own or did you file just for the fun of filing? Like that kid in the breakfast club who has a fake ID to vote – Kai Qing Aug 14 '18 at 16:25
  • @KaiQing I was making money delivering newspapers. Not really something kids can do these days. – Todd Wilcox Aug 14 '18 at 16:27

3 Answers3

67

Operating a lemonade stand would count as self-employment, and if they earned more than $400 they would be required to file a tax return. In this case, the income is too low for there to be any income tax obligation, only a filing requirement due to self-employment income. The tax return would be theirs, but the parents would still claim the child as a dependent. If they are unable to file, the parents would file on their behalf, but it's still a return in their name, the income is not combined into their parents tax return.

Edit:
Even though the question is in the context of earned income, it's important to note that unearned income (think passive income like interest/dividends) has separate rules and depending on the amounts can be included on the parents' return, or a portion of it can be taxed at the parents' tax rate even if filing a separate return for the child.

Hart CO
  • 70,420
  • 9
  • 171
  • 214
  • 3
    Ok good to know. So even though they are a child, once the income meets the threshold where there is a tax obligation, the filing is done on behalf of the child, and not in combination with the parents. – Kai Qing Aug 13 '18 at 17:03
  • 5
    I'm using lemonade stand to make it universally understood in dynamics. The reality is she is selling things online of multiple varieties and could stand to make far more than $3k (sorry, this was in response to a now deleted comment) – Kai Qing Aug 13 '18 at 17:22
  • 3
    When it's earned income it's done in the name of the child. Substantial unearned income is another matter, and generally is taxed at the parent's rate, although I'm not sure how it's actually filed. – Loren Pechtel Aug 13 '18 at 20:43
  • 1
    @KaiQing that might be a substantial difference if she sells them on a recurring basis. I have no idea about the US, but in Germany that would be the difference between having to register a business and not having to. And it might not even be possible to do that for an 8 yr old, making the selling illegal in the end. Maybe you should ask another question with details about how often and in what period of time etc this is happening. – DonQuiKong Aug 13 '18 at 20:55
  • @DonQuiKong - I guess as recurring as random sales on a site like ebay could be. You list them, and they sell when they sell. Or they don't. We only have statistics to project the possible income, but not necessarily a business like arrangement where we supply certain volume quarterly or anything. Based on your comment, I think my new question would be very broad and effectively be chalked up to - how do you start a business in the USA, which would be closed immediately. Learn as we go I guess. – Kai Qing Aug 13 '18 at 21:08
  • 1
    A few years ago there was a girl in Seattle who would set up a lemonade stand at the same spot along a popular trail every summer. She was making somewhere in the thousands over the course of a summer and eventually made the news and then had to quit. – nurdyguy Aug 13 '18 at 21:24
  • 1
    @nurdyguy - did she have to quit for legal reasons or because it was too much to handle? – Kai Qing Aug 13 '18 at 21:34
  • 4
    @DonQuiKong In the US there's not much fuss to having a business in the eyes of the IRS, most of the time there's no need to register the business with the government, you just report the business income to the IRS. Buying and selling on ebay is a common small business model, it's not typically considered a hobby if there's a profit-motive. – Hart CO Aug 13 '18 at 21:36
  • 1
    @KaiQing It was shut down by city health inspector. – Hart CO Aug 13 '18 at 21:39
  • Lol - ok that makes sense. As I said elsewhere, I used lemonade as a well known illustration. There's no health or safety risk in selling crafts on ebay. – Kai Qing Aug 13 '18 at 21:46
  • 1
    If a kid at a lemonade stand made $3k in cash, why would that person need to file a tax return when you can just keep it, not pay taxes, and the government won't know since cash doesn't leave a paper trail? I'm clearly new to finance so if someone can help that'd be great. – David G Aug 13 '18 at 23:52
  • 6
    @0x499602D2 Because that's tax evasion, unlikely to get caught for $3k, but the IRS catches people with some frequency. – Hart CO Aug 14 '18 at 00:49
  • @HartCO I understand it's tax evasion but if it's paper money then how could the IRS catch that? – David G Aug 14 '18 at 01:47
  • 1
    @0x499602D2 because she bragged to her friend who told his dad who happened to work for the IRS? – user253751 Aug 14 '18 at 03:25
  • 4
    @0x499602D2 They typically catch people when it's larger sums, and they buy expensive things but show little or no income, things like that. Or if there's a newspaper article about her successful little business the IRS takes notice, stuff like that, not super common, but it does happen. – Hart CO Aug 14 '18 at 03:55
  • Is it tax evasion to use a child as a means of an extra income (tax offsetting?). – insidesin Aug 14 '18 at 06:03
  • 2
    @insidesin Yes it is tax evasion if you are not truthfully representing what happened. But it all depends on the the situation, and your comment if it was proposed as a separate question would need to be much more detailed. – mhoran_psprep Aug 14 '18 at 10:24
  • 1
    @KaiQing I'm sorry to inform you, but if the state takes notice of child's business, it can find numerous illegal activities. i.e. If she is making these items, how many hours a week is she working to make these items? Will she be making these items for small children? Even if not for small children, do they pose a choking hazard? This all from a laymen. One versed in employment law, environmental regulations, and labor laws could create I would suppose hundreds of pages of regulations. We all commit "three felonies a day"...never forget that. – paulj Aug 14 '18 at 14:16
  • 2
    @paulj - I'm not going to say what she's making but it in no way involves small pieces, choking items, food, consumables at all or anything remotely dangerous. It is very close to a business some kids were featured for on shark tank and they bought in to them. I'm not worried about legalities in that nature. She makes them while watching movies in the evening. Not hugely laborious, just something to do with your hands while you sit and do nothing. All I care about is how to file the taxes on it and keep encouraging her to never spend a second of her life in conventional employment. – Kai Qing Aug 14 '18 at 14:59
  • 2
    @0x499602D2 RE: cash-only business, other people will generate an IRS auditable paper trail for you. If money ever goes to a bank, to a supplier, to pay somebody for services who properly reports it, they create records that the IRS can follow. Finally, the IRS can simply find you as a customer; your business isn't going to be very successful if absolutely nobody has heard of it. – user71659 Aug 14 '18 at 16:48
33

This actually happened to my brother. Started a Minecraft server at the age of 14 which became massive and netted him about 100k through donations in a year. He had to file it as personal income (my parents obviously helped him do it) and pay taxes on it himself.

TheSaint321
  • 431
  • 3
  • 5
  • 1
    That's awesome. Do you know if he filed it as earned or unearned income? I'm not sure how donations work per say. – Kai Qing Aug 13 '18 at 22:51
  • 3
    I believe he filed it as earned income. Eventually he got it filed as an LLC and payed himself a salary through it to prevent liability issues. – TheSaint321 Aug 13 '18 at 23:56
  • 15
    LLC: Smart move! (And probably worth editing in to the answer.) – Martin Bonner supports Monica Aug 14 '18 at 12:11
  • Note that in most states, a single-member LLC doesn't actually provide any legal liability protection. It can help the tax treatment substantially, though, if filing taxes as an S-corp, and most of the profit as not treated as a wage. – Phil Miller Aug 15 '18 at 19:35
8

After the clarifications to the question, noting that this is a child selling things on eBay, I'd be a bit more cautious about the tax implications.

In particular, eBay does not allow users under 18 to have accounts:

Because listings on eBay involve entering into a contract, we require all our members to be aged 18 years or older.

As such, it's possible that you, not your child, would be the one earning the income from the sales (see this article for example). That's not to say you couldn't arrange to "buy" the products from your child at full cost, minus shipping, or somesuch, but it's something to be aware of.

That aside, if a child does have earned income, that income would be reported just as any other income, assuming it's sufficient to require filling (> $6k).

Joe
  • 35,786
  • 6
  • 90
  • 128
  • 4
    And once again I'm taken way too literally. Let me just clarify for everyone I will not in any way expose what she is actually doing because I don't want anyone else to jump on the bandwagon. Simple as that. She does not have any accounts on third party sites. She does not have a card processing account. She doesn't even have an email address. Let's just focus on the abstract - does a child file on their own, or jointly with their parents – Kai Qing Aug 14 '18 at 16:22
  • 2
    But good point about > $6k. That's a good general idea to note the thresholds since looking things up all the time isn't motivating – Kai Qing Aug 14 '18 at 16:23
  • 4
    @KaiQing I think the point here is that it's not a direct straightforward answer. The particular situation will determine. Ordinary earned income is filed as a child. Ordinary unearned income is filed essentially as the parent (not exactly the same, but it ends up being taxed similarly, to avoid parents gifting large amounts to avoid/lower taxes). But whether something is earned or unearned is complicated when it's not just a normal job or a normal investment. – Joe Aug 14 '18 at 16:26
  • Privacy concerns are totally understandable re: posting the exact details here; but if she's doing something on the order of a business, you should at least talk to a tax accountant including the small details to make sure you do it properly. – Joe Aug 14 '18 at 16:27
  • How does one differentiate between earned and unearned? That's coming up a lot in this one question so I'm beginning to think it's not as I perceive it - like you sell something and it is earned, or someone dies and you inherit it and that is unearned. That may be the subject of another question I suppose – Kai Qing Aug 14 '18 at 16:29
  • Oh you know, an answer above mentioned the definition in an edit. Interest. Makes sense – Kai Qing Aug 14 '18 at 16:31
  • 3
    Note that the >6k threshold mentioned here is separate from the self-employment filing threshold of $400. So many rules to follow. – Hart CO Aug 14 '18 at 21:45
  • @KaiQing Earned means you did something to add value. Unearned means you got money without adding value yourself. Interest, investment, etc. – Joe Aug 14 '18 at 22:21