Remember back at the start of summer when you told your teen to get a job and they actually did? Did you know the tax ramifications of a summer job for your teen? Don’t worry, it’s not that complicated so here’s the run down.
Summer Job – Employee
Chances are your teen got a job as an employee lifeguarding, making sandwiches at a restaurant, working as a counselor at daycamp, or other summer opportunities. As an employee, the employer asked them to fill out a W-4 which basically tells what level federal & state taxes to take out of the paycheck. If you still consider your teen a dependent (you’re still paying for the roof over their head and most expenses because teens are expensive!) if they don’t plan to make over $6,350 they can put exempt on the W-4 and not have any taxes withheld. This $6,350 amount is the standard deduction limit for 2017 meaning no federal taxes are assessed up to that amount of earned income, or wages. If your teen’s total earned income is under $6,350 for the whole year and no income tax was withheld, no tax return needs to be filed (win-win!). If your teen had taxes withheld or earned over $6,350 they will have to file an income tax return come January 2018 to get any potential refund back or pay any taxes owed. Usually a 1040-EZ is all they need and there are many free online software programs you can use.
Summer Job – Independent Contractor
If your teen went out on their own for work, created a business, or was classified as an independent contractor by the person they worked for, chances are they will need to file a tax return and owe taxes. Instead of filling out a W-4, they should have been asked to fill out a W-9. In January instead of being issued a W-2 like a traditional employee, they will receive a 1099-MISC from the business that paid them money for their services. All income and expenses associated with that income (mileage, supplies, equipment, etc) are put on a Schedule C. Self-employment tax on net income (income – expenses) is assessed at 15.3%. A return is required to be filed on self-employment income over $400. As an employee, you don’t really notice employment taxes as half of the full amount–7.65%–is automatically withdrawn (employee portion) and the employer pays the other half separately from the paycheck. Even if your teen earned less than $6,350 and has no federal income tax assessed, self-employment tax is still assessed.
Summer Job – Family Business
Have a family business that you or your spouse owns and want to give your teen the opportunity to work with you? If that business is a sole proprietorship or partnership, no FICA taxes are required to be withheld for child employees under 18. Under 21, no FUTA taxes are required.
As mentioned above, if you provide over half the financial support for your teen and they live with you at least half the year (or are students at college aged 19-23), you can claim the dependency exemption for them on your tax return. The dependency exemption for 2017 is $4,050 and can mean tax savings estimated at $1,000 for you (depending on your marginal tax rate). If you claim your teen as a dependent, make sure that if they are required to file a tax return they don’t accidentally claim the exemption also.
Enjoy the rest of summer and I hope your teen made some money at their summer job!