Summer Jobs and Taxes: What Parents and Teens Need to Know

The lazy days of summer will soon be here but for many young adults, summertime means heading off to work for the first time. According to the U.S. Bureau of Labor Statistics, approximately 19.5 million individuals aged 16 to 24 were employed in July 2012. Working a summer gig is a great way for teens to learn about financial responsibility while earning some extra spending money. Parents need to understand the potential tax implications for themselves and for their kids who are joining the summer workforce.

Income Reporting and Withholdings

One of the first things that parents and teens need to be aware of is how summer job income will be reported. If your child is working as an employee of a business, they’ll typically be required to complete a W-4 as part of the hiring process. This form tells the employer how much money to take out for federal and state income taxes. Line 7 of the W-4 form allows employees to claim an exemption from federal income tax withholding if they don’t believe they’ll earn more than the standard deduction threshold. For the 2012 tax year, the standard deduction for single taxpayers is $5,950, which means a dependent child can earn that much without having to file a tax return. If you or your child isn’t sure how much cash their summer job will generate, they can claim zero exemptions to make sure they won’t owe Uncle Sam at tax time. If they earn more than the exemption limit, they’ll need to file a return but they’ll likely be refunded most of the taxes that were withheld.

Self-Employed and Independent Contractors

If your teen has an entrepreneurial spirit, they may want to start their own summer business. While you may not think money from mowing lawns or babysitting would be taxable, the IRS takes a different view. Teens who earn more than $400 from self-employment are required to file a tax return. They’ll also need to file Schedule C to report their income and claim any qualified business deductions, such as mileage or expenses for supplies and equipment.

In some cases, employers may decide to hire teens as independent contractors, which means for tax purposes they’ll effectively be considered self-employed. Independent contractors who earn more than $600 will receive a 1099 form, rather than a W-2. Whether your child is working for themselves or on a contract basis, you both need to be aware that no taxes will be withheld from their income. Depending on how much money they make they may not be owe any federal income tax but they may still have to pay self-employment tax. As of 2013, self-employment tax is calculated as 15.3 percent of net earnings, excluding any business-related expenses.

Claiming Working Dependents

Even if your teen works during the summer or at any other time during the year, you may still be able to claim them on your taxes as a dependent. According to IRS guidelines, a working child can still be claimed as a dependent, regardless of how much they earn, as long as they don’t provide more than half their own support. If your employed teen is under the age of 17 and meets the requirements for an eligible dependent, you can also claim the Child Tax Credit, which is worth up to $1,000 per child.

Special Situations

If you own your own business it may be to your advantage to hire your teen for the summer. According to the tax code, parents are not required to withhold FICA taxes from children in their employ as long as they’re under 18. If your child is under age 21, you also aren’t required to withhold federal unemployment tax. Just keep in mind that you’ll have to withhold income tax if they end up earning more than the filing threshold limit. If your child receives any form of investment income while working, they could end up being subject to the kiddie tax. For 2012, children under 18 were required to file a tax return if they had any unearned income in excess of $950.

Taking on a summer job can be a significant learning experience for teens and parents, especially when dealing with taxes. Knowing what to expect can help you both to be prepared once it’s time to file.