Teen Jobs and Tax Issues

Posted by Christian Wynns on July 7th, 2016

A summer job is a classic rite of passage for teenagers. But teen jobs can be a source of aggravation for young workers and parents who aren’t prepared to deal with the potential taxes.

When it comes to income, the IRS generally wants its cut, regardless of the earner’s age. But some special tax rules apply to young workers, based not only on age, but also on amount of money earned and even the type of job.

First, the good news: A youngster who is a dependent of another taxpayer generally doesn’t have to file an income tax return unless the youth makes more than the standard deduction amount for a single filer. The 2015 tax year standard deduction for single taxpayers is $6,300. A dependent youth can earn up to that much and not have to file a tax return. If a young person doesn’t expect to earn more than the threshold amount, he or she needs to note line 7 when filling out a W-4 at the summer workplace. That’s where the teen might be able to claim exemption from federal income tax withholding.

In fact, novice workers should pay close attention to all employment paperwork. It could dramatically affect their tax responsibilities. If paid as a contractor, which means earnings are reported to the worker and the IRS on a Form 1099-MISC rather than a W-2, the youth is, for tax purposes, self-employed. That designation means that even if the young worker doesn’t earn enough to owe federal income taxes, he or she could owe Uncle Sam self-employment taxes.

Special rules for some teen jobs

Some young business people, however, do get a bit of a break. There are special tax rules for typical teen jobs.

Individuals who provide baby-sitting and lawn-mowing services are viewed by the IRS as household employees. In these cases, a household employee who is younger than 18 at any time during the tax year the work was performed is not subject to Social Security and Medicare taxes. The same self-employment exemption also is allowed for newspaper carriers, distributors or vendors younger than 18.

The family business

Instead of starting a new enterprise, some youths opt to go into the family business. In addition to having the inside track with the boss, this work situation might provide some tax relief for the employing parents, as well as the young worker.

When a parent’s business is unincorporated, the hiring mom or dad doesn’t have to withhold FICA taxes if the youth is younger than 18. Federal unemployment tax payments also aren’t required for the child if he or she is under age 21. However, parents who are generous employers will have to withhold income taxes if they pay their teenager more than the filing trigger amount.

Other income issues

Tax responsibilities also can be complicated when a youngster receives earned (work-related) and unearned (investment) income in the same tax year. When a youth receives investment income, that amount also must be added to the youngster’s earned income in determining his or her federal filing requirements. Generally, children age 18 or younger must file and pay taxes on their unearned income when it exceeds a certain amount. For 2015, filing is required on unearned income of more than $1050.

Further, if a child operates his or her own business, there are a number of additional tax-related items that need to be considered.
 

See your local tax advisor for more information.

Source: Kay Bell, Bankrate.com