Now that summer is coming to an end, many teens are getting ready to go back to school and will say goodbye to their summer job. Before you let them go off and spend all of their hard-earned money on an expensive pair of back-to-school tennis shoes, you’ll want to make sure that they have enough to pay Uncle Sam come tax time. Allow me to offer a few important tax tips to help get you ready for April 15th.
Let me start by saying that it is very likely that your teen won’t owe the IRS anything if he or she is working a seasonal job and earning less than $5,700 (for 2010) throughout the year. If your child is hired as an employee, they will be asked to fill out a form W-4 which will help the employer to determine how much to withhold from each pay. If your teen expects to end the year under the $5,700 mark, they will simply write “exempt” on line 7 of the W-4. This will ensure that he or she maximizes the amount of each paycheck. On the other hand, if your teen worker expects total wages above $5,700, it may be necessary to claim “0” or “1” allowance on the the W-4. This way, an appropriate amount will be withheld from each check to cover any balance due on the tax return. If your teen receives tips of any kind, these must also be reported as wages and included in the total amount earned on the tax return.
Some teenage workers may instead be hired as independent contractors. This means that, for tax purposes, the teen in considered self-employed and will be responsible for paying self employment tax. Wages are reported to the IRS on a form called a 1099-MISC instead of the standard W-2. Even if your teen falls below the $5,700 threshold and doesn’t owe income tax, they may owe self employment tax on the amount they earn. This is a tax of 15.3% which is equal to what an employee would pay in FICA tax (social security and medicare). Self employment tax is required when anyone in a contractor role exceeds $400 in income for the year. If your teenager is babysitting or mowing lawns in a residential environment, they are considered “household employees” and are therefore not subject to these requirements if they are under 18.
If your teen receives investment income or “unearned income” of $950 or more in 2010, they must add that figure to their wages or “earned income” to determine if there is a filing requirement. For more details on reporting investment income, reference Publication 17 IRS website.
Keep in mind also that, even if a tax return is not required, it may still make sense to file if your child has a withholding eligible for refund. I don’t know a single teenager that wouldn’t like a few extra dollars in their pocket!
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.