School is out for the summer! Is your teenager taking on a summer job? If so, you both may have questions about taxes. Below we will address some of the common questions from parents and teens.
Typical Wage Paying Summer Jobs
When your child chooses an average wage-paying job, he or she will need to calculate allowances and fill out a Form W-4. Is your child prepared to complete the form? Talk with your child about the options and what they mean for his or her cash flow. Claiming zero deductions means withholding the maximum amount, and it is the safest strategy. But, beware! This option could tie up hard-earned cash until a tax return is filed. Advise your teen not to claim too many allowances since this can cause underwithholding, especially if the he or she works multiple part-time jobs during the year. To get help with figuring allowances, try the withholding calculator at www.irs.gov. (See “Filing Information for Individuals.”)
Your Child, Entrepreneur for the Summer
If your child decides to babysit, mow lawns or perform other tasks where she will be her own boss, there are some additional tax issues to consider. These self-employment endeavors will likely result in taxable income, for federal and state income taxes purposes. If your child’s net earnings are $400 or more, he or she will also owe self-employment taxes. Most taxes can be paid at the time that your child files a 2013 tax return, but when the income is substantial, estimated tax deposits may be necessary.
Self-employment can be a great learning opportunity for your teen since being self-employed means keeping detailed records of income and business expenses. You can suggest your teen purchase a simple ledger book to help organize the records. Or, this may be an opportunity for your child to learn a computer program, like Excel or Numbers, to provide a simple computerized tracking of expenses and income. When tracking income, remember that tips/gratuities are not just a thank you– the IRS considers them taxable income.
A Job in a Family-Owned Business
Do you own a business? Summer jobs can sometimes provide tax breaks for a teen’s parents. Business owners are allowed to hire their children and deduct the wages, which shifts income from the parent’s higher income bracket to the child’s lower bracket. Additionally, if you operate as a sole proprietor, it is not necessary to pay FICA taxes if your teen is under age 18 or federal unemployment taxes if the child is under age 21. Keep in mind that the wages you pay your child should always be appropriate for the work he or she performs.
Before your teen spends all that summer income, consider that he or she can also qualify for a Roth IRA. The teen, a parent, or someone else can contribute the lower amount of $5,500 or the child’s annual earned income to the IRA.
Summer employment is many teenagers’ first experience in the real job market. Help your child make it a tax-smart experience, too. If you have questions about taxes and summer jobs, give us a call. Cook CPA Group at email@example.com or 916-432-2218