Summer Jobs are in Full Swing: We have Student Tax Tips to Help!
With another school year coming to an end, many students will be starting summer jobs which provide a great opportunity to improve their work ethic and time management skills as well as gain more responsibility financially. As with any job; however, students working over the summer are not exempt from paying their fair share to Uncle Sam. Below is a list of tips to assist you and your teenager in planning for tax time as they begin their summer job:
- Understand the Rules for Claiming Dependents
Just because your child has a summer job it does not mean that you will no longer be able to claim them as a dependent. If your child is under the age of 19 (or under the age of 24 if they are a full-time student) and you provide more than half of their support, you can still claim them as a dependent. Support includes food, shelter, clothing, entertainment, school tuition and expenses, vehicle expenses, etc. Regardless of their income, if your child meets the age requirements and you are paying over half of their living expenses, in most cases they qualify as a dependent and can be claimed.
- Filling Out Forms: Determine How Much To Withhold
Before your child begins a summer job, he or she will be required to fill out a Federal and State forms to instruct the employer how much to withhold for Federal and State income taxes. To determine how much, if any, should be withheld, it is important to note the thresholds of when your child will need to file an income tax return. Estimate how much they will earn this summer based on their wages and expected hours to be worked. Regardless of amounts withheld for income taxes, Social Security and Medicare tax will be withheld at the regular 6.2 and 1.45 percent rate and is never available for refund.
- If No Taxes are Withheld, Set Money Aside to Be Prepared for Tax Time
Your child may be treated as an independent contractor for their temporary summer work. In this instance, your child's paycheck will not include any deductions for Social Security and Medicare tax, nor will there be any withholdings for Federal or State income tax. If $600 or more is earned from this employer, your child should receive a 1099-MISC at the end of the year. Most likely the income will be shown as "Non-employee Compensation" in box 7 of the 1099-MISC. This is treated as self-employment income and is subject to self-employment (Social Security and Medicare) taxes. In this case, your child must file a return if earnings were at least $400. Be aware that because the employer did not withhold and pay any taxes on behalf of your child, taxes may be owed when tax returns are filed the following Spring. Know the Tax Implications of Employing your Child.
Many of you may be exploring the idea of hiring your child for the summer. Giving your child a summer job may provide an opportunity for tax savings for you as the employer as well as for your child. There are tax benefits of having your child as an employee if your trade or business is a sole proprietorship or partnership in which you and/or your spouse are the sole owners or partners. Wages paid to your child who is under the age of 18 are not subject to Social Security and Medicare taxes, or Federal Unemployment Tax (FUTA). Wages paid to your child who is 18 years or older, but under 21, are not subject to FUTA. Your child's wages are a deductible business expense to your company, as long as your child is treated as a regular employee, paid a fair and reasonable wage, paid wages in dollars, and a W-2 is filed.
- Understand Roth IRA Eligibility and Benefits
Something else to keep in mind if your child gets a summer job is that he or she will be eligible to start making Roth IRA contributions. A Roth IRA requires the contributor to pay tax at the time of contribution: however, the contributions can be withdrawn tax-free and penalty-free at any age. This can be a great retirement and tax saving strategy because the child will pay very little to no tax on the contribution now since they are in a lower tax bracket rather than pay tax later at a much higher rate when a retirement distribution is taken.
There is much to consider as your child explores his or her opportunities for a summer job. Although the work is normally simple and temporary, the tax implications can be fairly complex.
For more in depth information visit: https://www.irs.gov/uac/tax-tips-for-students-with-summer-jobs
Article by: Zachary Triplett, Staff Accountant