You’re excited about opening a Roth IRA for your child. You’ve seen the projections—how a few thousand dollars saved today can become a life-changing sum in the future. But then you hit the first, and most important, rule: your child must have earned income. Suddenly, a cloud of uncertainty appears. Does their allowance count? What about birthday money from Grandma? If you pay them for chores, is that legit?
This is the single biggest point of confusion for parents, and getting it wrong can lead to penalties from the IRS. This guide will give you a clear, authoritative breakdown of what counts as earned income for a kid’s Roth IRA. We’ll separate fact from fiction so you can contribute with confidence and stay fully compliant.
The IRS Definition of Earned Income
The IRS is very specific about what it considers “earned income” (also called “compensation”). For the purpose of IRA contributions, it generally includes all the income an individual earns from working. It does not include money they receive as a gift or from investments.
Here’s what typically qualifies:
- W-2 Income: This is the easiest to document. If your child has a formal job—working at a local ice cream shop, a grocery store, or a summer camp—they will receive a W-2 form. The wages reported on this form are considered earned income.
- Self-Employment Income: This is where most kids’ income falls. It’s money earned from providing goods or services in a trade or business. This is the category for babysitting, mowing lawns, dog walking, tutoring, selling crafts, or running a small online business.
What Does NOT Count as Earned Income?
This is just as important to understand. The following sources of money are considered “unearned income” and cannot be used to justify Roth IRA contributions:
- Allowance: Money you give your child for routine household chores is generally not considered earned income.
- Gifts: Cash from birthdays, holidays, or generous relatives does not count.
- Investment Income: Interest, dividends, or capital gains from other investments are not earned income.
The Litmus Test: Ask yourself, “Would someone else pay my child to do this job?” If the answer is yes, it’s likely a legitimate business activity. If it’s a task you would only pay your own child to do (like cleaning their own room), it’s likely not.
Legitimate Self-Employment for Kids: Making it Official
Most kids won’t have a W-2 job. Their income will come from side hustles. To ensure this income is legitimate in the eyes of the IRS, you need to treat it like a real business.
1. The Work Must Be Real and Age-Appropriate
The job must be a genuine service or business. Paying your 5-year-old $5,000 to be a “social media consultant” for your family business will raise red flags. However, paying your 14-year-old a reasonable wage to file papers, clean the office, or manage the business’s Instagram account is perfectly legitimate.
Examples of Legit Jobs:
- Babysitting for neighbors
- Mowing lawns or doing yard work in the community
- Pet sitting or dog walking
- Tutoring younger students
- Selling handmade goods (e.g., on Etsy)
- Working for the family business
2. The Pay Must Be Reasonable
The amount you pay your child must be consistent with the market rate for that job. You can’t pay your child $500 to mow your lawn once if a local service would charge $50. If you’re paying them for work in your own business, their wage should be comparable to what you would pay any other employee for the same tasks.
3. Keep Meticulous Records
This is the most critical step for proving self-employment income. If the IRS ever questions the contributions, you need a paper trail. Your documentation should include:
- An Income Log: A simple spreadsheet or notebook that details the date of work, a description of the service provided, the client (who paid), and the amount earned.
- Invoices: For bigger jobs, have your child create a simple invoice. This adds a layer of professionalism and documentation.
- Payment Records: Keep copies of checks or digital payment receipts (like Venmo or Zelle transactions) that clearly state what the payment was for.
(For templates and a detailed guide, read: The Complete Guide to Documenting Your Child’s Income)
Special Case: The Family Business
Hiring your child to work in your family business is a fantastic way for them to earn income. It’s legitimate and easy to document. Here’s how to do it right:
- Assign Real Duties: Give them actual responsibilities that contribute to the business. This could be anything from cleaning and organizing to social media management or customer service.
- Pay a Reasonable Wage: Pay them the same rate you would pay anyone else for the same job.
- Keep Them on Payroll: The cleanest way to do this is to put them on your official payroll and issue a W-2 at the end of the year. This creates an undeniable paper trail. If you pay them as a contractor, issue a Form 1099-NEC if you pay them $600 or more in a year.
The Bottom Line: When in Doubt, Document
Understanding what qualifies as earned income for a kid’s Roth IRA is the key to unlocking this powerful investment tool. The rules are straightforward: the income must come from real work, the pay must be reasonable, and you must keep records.
By treating your child’s work like the real business it is, you not only stay compliant with the IRS but also teach them invaluable lessons about professionalism, responsibility, and the rewards of hard work. Ready to find some income opportunities? Check out our list of 25+ Legit Jobs for Kids.
Disclaimer: This article is for educational purposes only and is not a substitute for professional tax or legal advice. The IRS rules regarding earned income can be complex. We strongly recommend consulting with a qualified tax professional to ensure you are in full compliance.