Teens, Taxes and Summer Jobs
If your teen has a job this summer, you're probably thankful he's earning some cash so he doesn't come to you begging for money all the time. Uncle Sam's glad, too, because some of that money might be coming his way. That's right -- your child might owe taxes on the money he earns this summer.
Here are five things the IRS wants you to know about income earned from a summer job:
1. If your child is an employee, she must fill out a W-4, which determines the amount of income tax that will be withheld from her paycheck. The form offers a tantalizing option for blocking withholding all together, but the exemption is available only for those who owed no federal income tax for 2009 and expect to owe $0 this year, too. (Even workers exempt from income tax withholding will see their paychecks nipped by the Social Security and Medicare tax.) The instructions for the W-4 will lead most summertime workers to claim just one withholding allowance -- which will likely lead to overwitholding and a tax refund next spring. Kids who are claimed as dependents on their parents' returns must file a tax return if they earn more than $5,700 from a job in 2010. If your child earned less than that, she still may be required to file a return if she earns more than $300 for the year from any investments in her name, such as from a bank account, mutual fund or custodial account.
2. Tips are taxable. If your child works as a waiter or camp counselor, for example, and receives tips, she must report that income.
3.The IRS wants to know if your child has self-employment income, for example, from babysitting or mowing laws. Your teen must pay self-employment tax -- in addition to income tax-- if he earns more than $400. Your child will need to file Schedule SE to figure self-employment tax, which includes Social Security and Medicare taxes. The rate is 15.3% of net earnings.
4. Special rules apply to newspaper carriers. They are considered self-employed if their pay is related to sales rather than hours worked and their contract states that they are not employees. Usually, newspaper carriers younger than 18 don't have to pay self-employment tax.
5. Active duty ROTC pay is taxable. However, food and lodging allowances paid to ROTC students participating in advanced training are not taxable.