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A free EIN from the IRS, then registration with the Colorado Department of Labor and Employment for state unemployment insurance.
Charles Trautman, EA · Since 1969
Two family tax rules that surprise people. One is about money in your child’s name; the other is about the person you pay to help at home.
They have nothing to do with each other except that both live inside ordinary family life and both arrive uninvited. A grandparent’s gift of stock turns into a child’s tax return at the parents’ rate. The aide who comes three days a week to help with Dad turns the family into an employer with payroll forms to file. Neither is hard once you know the rule.
Current as of October 2026 · Figures are for tax year 2026
Parents used to park investments in their children’s names to use the children’s low rates. This is the rule that stopped it.
The kiddie tax applies to a child’s unearned income: interest, dividends, capital gains, taxable scholarship money, and distributions from an inherited IRA. Wages are not touched. The unearned income is stacked in three tiers.
| Child’s unearned income | Amount | Taxed at |
|---|---|---|
| First tier | $0–$1,350 | Not taxed |
| Second tier | $1,350–$2,700 | The child’s own rate |
| Above the line | Over $2,700 | The parents’ marginal rate, computed on Form 8615 |
The parents’ rate includes the capital gains rates if the child’s income is gains or qualified dividends. The child’s return is always finished after the parents’.
Every child under 18 at year end. A child who is 18, or a full-time student from 19 through 23, is also covered unless their own earned income paid more than half their support. A 22-year-old in college on the parents’ dime is in.
The parent the child lives with, or the higher-income parent if they file separately. A dependent child with unearned income over $1,350 generally must file a return (y the year’s filing line). When a child must file.
Where the kiddie tax actually bites, and the one shortcut the IRS offers.
A custodial account (UTMA or UGMA) is the usual home for money given to a child. The money is legally the child’s; a parent or grandparent manages it until the child reaches the age set by state law. Every dollar of interest, dividends and gains it produces is the child’s income, and past $2,700 the parents’ rate applies. A growth fund held for years can throw off a large gain the year the custodian rebalances, taxed as if the parents had sold it.
The same logic defeats a popular idea: giving appreciated stock to a child so the child sells it at a low rate. The gift carries the parents’ cost basis, so the whole gain is still there when the child sells, and everything above $2,700 is taxed at the parents’ capital gains rate, exactly where it would have been taxed anyway. It works only for small gains, or for a child outside the rule. How capital gains are taxed.
Emma is 12. Her UTMA account earned $5,000 of interest in 2026, and her parents file jointly in the 24% bracket. The first $1,350 is untaxed. The next $1,350 is taxed at Emma’s own rate, which is small. The remaining $2,300 is taxed at her parents’ 24%, or $552, on Form 8615. Had it been $5,000 of qualified dividends, the top tier would use her parents’ 15% capital gains rate, about $345.
Form 8615 or Form 8814? Form 8615 goes on the child’s own return and handles any unearned income. Form 8814 is the parents’ election: if the child’s income is only interest and dividends and totals less than $13,500, the parents may report it on their own return and skip the child’s. It saves a filing, but it raises the parents’ AGI, which can trim other credits, and it usually costs a little more. We run it both ways.
What avoids the tax: 529 plans, a Roth IRA funded from the child’s own wages, and growth investments held until the kiddie tax years are over. A child who inherits an IRA should spread the withdrawals.
The Form 1099 for a custodial account comes in the child’s name and is mailed to whoever opened the account, often a grandparent; parents routinely don’t know it exists. We ask whether anyone has ever opened an account for the child, and we pull the IRS wage-and-income transcript for the child’s number before the return is final. That is how we find the dividends nobody mentioned.
If you pay someone to work in or around your home and you control how and when the work is done, that person is your employee. The IRS calls it the “nanny tax”; nannies are a minority of the cases we see.
A nanny on a schedule. A caregiver you hired directly for an aging parent. A housekeeper on set days. A yard worker you pay by the hour and direct yourself.
Agency staff; the agency is the employer. A cleaning company or lawn service with its own business and other customers. A contractor hired for a job. You owe nothing but the invoice.
Control. If you decide the hours and the tasks, it is employment, whatever you both call it and whether the worker is part-time, paid in cash, or a friend of the family. The case that surprises people most is the aide paid from Mom’s checking account for three years: Mom is the employer, and the child with power of attorney has to make the filings happen. It often surfaces at the final return, which is too late.
It all rides along with your own Form 1040. No separate business return.
| Tax | Applies once you pay | What it is |
|---|---|---|
| Social Security and Medicare (FICA) | $3,000 in the year, to one worker | 15.3% of cash wages: 7.65% withheld from the worker and 7.65% from you; you may pay both halves |
| Federal unemployment (FUTA) | $1,000 in any calendar quarter, all workers combined | A small percentage of the first $7,000 of each worker’s wages |
| Federal income tax withholding | Only if the worker asks and you agree | Optional |
The FICA line is indexed each year, so confirm the current amount. Once you cross it, the tax applies to all the year’s wages, not just the excess.
A free EIN from the IRS, then registration with the Colorado Department of Labor and Employment for state unemployment insurance.
Hours, gross pay, dates. Withhold the worker’s 7.65% or pay it for them; many families do.
The worker gets a Form W-2 by January 31, with a copy to Social Security. This is what gives the worker Social Security credit for the year.
The year’s FICA and FUTA are totaled on Schedule H and added to your own tax. Raise your withholding or make an estimated payment so the bill doesn’t land all at once.
Paying family: wages to your spouse, your child under 21, and in most cases your parent are exempt from FICA and FUTA; the parent exemption has exceptions when the parent is caring for your young or disabled child under certain conditions. Students under 18 are also exempt. An adult child over 21 you pay to care for you is a regular household employee.
The child and dependent care credit requires the provider’s name, address and taxpayer identification number. When the provider is an individual rather than a daycare center, we ask who controls the work, because the credit and Schedule H are two halves of the same fact. Nanny expenses with no Schedule H attached are one of the easiest mismatches for the IRS to spot.
The risk of ignoring it is not usually an audit. It is the day the relationship ends. The caregiver files for unemployment and the state finds no employer account; the nanny applies for Social Security and has no earnings record. Each leads back to you, with back taxes, penalties and interest for every year.
Short, because Colorado mostly follows along.
Colorado starts from federal taxable income and taxes it at a flat 4.40%, with no separate kiddie tax computation. If the parents elect Form 8814, the income lands on their Colorado return instead. Colorado income tax basics.
Colorado requires household employers to register for state unemployment insurance and pay premiums on wages; the thresholds and rates are set by the Department of Labor and Employment, not the DOR. FAMLI premiums may apply too.
No. Wages are earned income, taxed at the child’s own rate, and $6,000 is under the standard deduction, so there is no federal tax. A good year to open a Roth.
The gift itself is not income and is within the annual gift exclusion. The dividends, and the gain when the stock is sold, are your daughter’s income, and above $2,700 a year they are taxed at your rate. Gift tax basics.
No. A 1099 is for independent businesses, and a nanny working your hours in your home is not one. The IRS and the state reclassify these, and the back taxes fall on you.
Bring the account statements, or the hours and pay for the person helping at home, and we’ll file the forms with your return. In person in Lone Tree or remotely, year round.
This page is general information, current as of October 2026, and is not advice about your situation. Tax law changes every year. Confirm anything that matters to you with us or at the sources below.