Taking on a summer job is a rite of passage for many teens. It’s also a great way for kids to learn some financial responsibility while earning their own money. It’s even provides an opportunity for young adults to get acquainted with what it means to have to pay taxes. In most cases, any money your teenager earns from working (from a year-round or summer job) is considered taxable income by the IRS. Whether or not they’ll have to fork over any cash to Uncle Sam depends on how much money they make and what kind of work they do.
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When your teenager gets hired for a summer job they’ll most likely have to complete a Form W-4 before they can start working. The purpose of the W-4 is to let the employer know how much the employee wants to have withheld for federal and state income taxes. Your teen can also use this form to claim an exemption from federal withholding if they don’t think they’ll earn more than the standard deduction limit.
Generally, as long as your child is considered a dependent and they don’t earn more than the standard deduction limit they won’t have to file a separate tax return on income generated from a summer job. The IRS considers anyone who is under age 19 a dependent, unless they’re permanently disabled. For 2022 taxes (which you’ll pay in 2023), the standard deduction is $12,950. So as long as they don’t make over that amount they won’t have to worry about filing in April.
If your teen is interested in branching out on their own, starting a summer business is a step in the right direction. You just need to keep in mind that whether it’s babysitting or mowing lawns, they may still be responsible for paying taxes on the money they make. Generally, the IRS requires teens who earn more than $400 from self-employment to file a tax return. If they have any expenses to deduct, such as mileage or equipment, they’ll also need to file a Schedule C. The self-employment tax rate is 15.3% of the net profits.
The self-employment tax rule also applies if your teen is working for an employer as an independent contractor, rather than an employee. In this situation, they would receive a Form 1099 at the end of the year if they earned more than $600. Depending on how much they earned, they may not have made enough to owe federal income tax but they’ll still be on the hook for self-employment tax.
If you or your spouse owns a business, putting your teen to work can give them some valuable entrepreneurial experience and it may even help you to score a tax break. If the business is set up as a sole proprietorship or partnership, you’re not required to withhold FICA taxes if your child is under 18.
You also don’t have to pay federal unemployment tax if they’re under age 21. Just keep in mind, however, that if you pay them more than the standard deduction limit you’ll still have to withhold federal income tax.
Claiming your son or daughter as a dependent on your income tax can add up to some serious tax savings but if they’re making their own money, it could throw a wrench in your plans.
Generally, the IRS allows you to claim eligible dependents who work as long as they don’t provide more than half of their own financial support during the year. Your teen also has to live with you for more than half the year. It’s important to note that if you do claim your teen as a dependent and they end up having to file a separate return for summer job income, they won’t be able to claim a personal exemption for themselves on their taxes.
The IRS defines income as earned or unearned for tax purposes. Generally, money from a summer job or self-employment would be considered earned income. Unearned income refers to money your child receives from investments, including interest, dividends and capital gains. If your teen has any unearned income on top of what they make at their summer job a different set of tax rules will apply.
The first $1,150 in unearned income your child receives is tax-free. The next $1,150 is subject to taxes. Anything over $2,300 will be subject to the parents’ marginal rate, which could mean a larger tax bite when it’s time to file. If you know your teen will be receiving taxable amounts of earned and unearned income, you may want to consult a tax professional about the best way to minimize the tax liability.
If you child wants to get a summer job, they’re already on the path to financial success. Not only does this allow them to gain experience in the workforce, it also shows them the kind of effort it takes to earn money. This will prove invaluable as your child graduates high school and makes their way into the real world.
Another area to focus on with your teen is get them to save some of that money. There’s a tendency for many kids to want to spend the money they earn. But getting them to use it intelligently and save the rest could have great long-lasting effects on their relationship with money.
Photo credit: ©iStock.com/JackF, ©iStock.com/kate_sept2004, ©iStock.com/Fertnig
Rebecca Lake, CEPF®Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children. Rebecca also holds the Certified Educator in Personal Finance (CEPF®) designation.
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