My 14-year-old has an LLC.
She loves animals and has been pet-sitting since 2019. When she wanted to start earning extra spending money, pet care seemed like the most obvious option, given her interests and age.
Using her spending account, she ordered business cards. Walking and biking the distance she was willing to travel, she slipped them in neighbors’ newspaper boxes and soon had her first inquiry. Word of mouth and a few Facebook posts spread the word; her business was off to a great start. Over time she built up a client base of regulars. Between dogs, cats, fish, guinea pigs, and a gecko, she’s provided her services with tender care and conscientiousness. As happens with our pet friends, she has greeted several new adoptions … and said a few sad goodbyes too.
Last summer, we walked her through the process of setting up an LLC. There is no minimum age limit in Virginia to own an LLC. As a minor, she cannot legally enter into any contracts, but that is not relevant to her line of work. She agonized over choosing the LLC name, landing on one that blended her name with Marvel Comic’s notion of the metaverse. By leaving pet care off, it kept it flexible for later expansion.
She registered on the Virginia State Corporation Commission (SCC) website and verified the name was available. With me watching over her shoulder, she registered her LLC and printed her certificate. I paid the $100 registration fee since setting up the LLC was more important to me than to her.
Next was an Employer Identification Number (EIN) from the IRS. We registered for this so she could open a business bank account at our local community bank. Because she wasn’t asking her pet families to give her a 1099, we were advised to create an electronic paper trail by depositing every payment in a business bank account. This - plus careful recordkeeping of which family paid which amount on which date for audit purposes – helps document her earned income.
Why go through all this effort? [especially since many folks prefer to avoid documenting cash income?]
It’s simple: Earned Income Unlocks Roth IRA Contributions
Let’s discuss.
As a teenager, my daughter has time on her side. She is below the federal standard deduction, so none of her earnings are subject to federal (or Virginia) income tax. Furthermore, payments for the services of a child under age 18 are not subject to social security and Medicare taxes.* As the LLC owner, she does incur self employment tax, but this is small. All of this is to say that from the IRS’s point of view, most of what she earns is hers to do with as she pleases. Part of this is to contribute to a Custodial Roth IRA for kids.
A Custodial Roth IRA is a tax-advantaged retirement account opened for a child who has earned income. My husband and I manage the account as custodians until she hits her legal age (typically between 18 and 25, depending on your state). This Custodial Roth IRA will be converted to a regular Roth IRA in her name when she turns 18 (Virginia’s age of majority).
As a 14-year-old, the maximum total IRA contributions she could make in 2023 was $6,500 or her total compensation ($7,000 in 2024), whichever is LESS. This is across both traditional and Roth IRAs, but as someone with minimal income and no tax burden, the Roth is the only way to go. By putting post-tax dollars in, she withdraws tax-free later. My daughter’s LLC netted $1,823 last year, which made this her maximum contribution.
Assume she was to invest that whole $1,823 on Jan 1, 2024 into a Roth IRA at Vanguard in the VTSAX (a total stock market index fund, which mirrors the Dow Jones, carrying a tiny 0.04% expense ratio). Also assume VTSAX’s future performance actually does match past performance (maybe it will, maybe it won’t), which is 510.29% since inception on 11/13/2000. That’s roughly 22%/year, which certainly exceeds the historic “10%/yr” rule of thumb for the stock market.
Either way, this one investment of $1,823 alone could grow as such:
If this doesn’t illustrate the time value of money, I don’t know what does. And did I mention these withdrawals are tax-free at the end?
Now, it can be an uphill battle to convince your kid to deposit all of their earnings into an account they can’t touch for years to come.
The good news is that it doesn't have to be their money that goes into the account. If your child meets the earned income requirement, you or anyone else can contribute instead. This is a great tool for parents with the financial flexibility to contribute on their kids' behalf, as an investment into their future.
Maybe offer to go halfsies – or just sock it away for them. They’re already kicking butt exercising their business muscles at a tender age. There’s a lot to be said for letting them enjoy their earnings. In our family bank, we’ve already taken away 50% for their longer-term savings anyway, so we don’t want to further disincentivize their efforts.
All of this to say – our daughter’s LLC is useful as a long term financial tool, as well as a coolness factor. How many 8th graders do you know have their own LLC? Plus it’s going to look great on her college applications, which could very likely end in Veterinary school. Time will tell.
*This material is for educational purposes only. None of this is to be construed as legal, tax, or investing advice. Speak with your own tax counsel or financial planner to ensure your particular situation is covered.
Not sure how to introduce money concepts to your children? Check out this online course: Raising Wealthy Kids
Stephanie Brooke Lennon is the author of Family Bank Blueprint, GoldQuest, and What Would Water Do? Simple Strategies for Navigating Life's Obstacles. Her titles are available in Paperback and Kindle on Amazon.com. Follow Stephanie Brooke on Facebook, Instagram, TikTok, YouTube, Twitter, Amazon, and at BrookeLennon.com.
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