Teen Taxes: What You Need To Know About Your Teen’s Summer Job

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Taking on a summer job is a rite of passage. Most of us at one point or another in our teens worked fast food, babysat, mowed lawns or delivered newspapers to earn pocket money.

You might find your son or daughter creating their own business or taking on more traditional summer jobs. Either way, having a working teen in the family can affect your taxes.

Working in the family business

Gone are the days of kids working as free labor on the family farm. If you own a sole proprietorship or partnership, having your teen spend the summer working for you gives him or her a taste of business ownership, and gives you some tax breaks.

If your teen is younger than 18, you won’t have to withhold FICA taxes from their pay. You are also exempt from paying federal unemployment tax until your teen turns 21.

Claiming a working teen as a dependent

You can still claim your employed teen as dependent if they meet the following criteria:

  • They must live with you for more than half the year and
  • They don’t provide more than half of their own financial support year-round

If your teen files their own tax return while you are still claiming them as a dependent, they can’t claim their own personal tax exemption on their tax returns.

Self-employment

If your teen passes up traditional summer jobs in favor of self-employment, running their own business can bring them the flexibility and satisfaction typically not found with most summer jobs.

This rule also applies if they earn more than $600.00 working for someone else as an independent contractor, regardless of whether or not the employer issues a 1099 form at the end of the year.

Although a self-employed teen may not earn enough to be subject to federal income taxes, they may still be liable for self-employment taxes at the rate of 15.3% of their net profit.

Taking on a summer job is a good way for teens to save toward a car or for college. Teens aren’t just limited to babysitting or cutting lawns any longer. With the expansion of technology comes a host of job opportunities for teens, in addition to a more flexible work model.

Regardless of which path your teens takes to summer employment, being aware of the possible tax implications for both you and your child will eliminate some stressful tax-related surprises at the end of the year.

As with any tax matter, enlist a qualified tax professional who can answer questions regarding your specific tax scenario, and who can help your teen with their tax-related questions.

Self-Employment Tax Tips

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Working as a freelancer had its advantages: more control over your time and who you work for. No time clocks or strict dress codes. No need to fill out a triplicate form to request a half day off for that doctor’s appointment. In other words, lots of perks.

Self-employment or freelancing also has its downsides, whether you run a business with employees or are a sole proprietor. For one thing, there’s no payroll department to deduct taxes on your behalf, so it is up to you to deduct and pay your own taxes on time each year.

First, the basics…

Self-employment taxes represent the Social Security and Medicare taxes that are normally deducted from a worker’s paycheck. The employer pays half, and the employee has the other half deducted from their check each pay period. The employer submits both parts each quarter, and these are the taxes that fund the Medicare and Social Security that workers typically draw from when they reach retirement age.

If you’re self-employed, however, you’ll be responsible for both parts. In essence, you’ll be paying twice what your employer deducted from your paycheck each payday.

The IRS calculates your Social Security and Medicare taxes by using a fixed percentage based on your net income (income after expenses are deducted). Let’s suppose your net self-employment income for the year was $10,000.00. Your self-employment tax would be $1530.00 or 15.3 percent of $10,000.00.

You’ll state this amount when preparing your taxes using Schedule SE.

How to pay self-employment tax:

  • Complete Form 1040, and attach Schedule C “Profit and Loss from Business” along with the Schedule SE.
  • Remit your payment along with Form 1040-V (payment voucher) and include a check or money order along with the voucher.
  • Mail the return to the address specified on the voucher.

If the thought of paying a lump sum each year leaves you cold, you could pay estimated taxes each quarter instead. You’ll send in 1/4 of your total tax liability each quarter. The IRS has more information on how to calculate your estimated taxes.

While there are many advantages to self-employment, the tax aspect can be a headache if you’re caught unprepared. By understanding the basics of self-employment tax, you’ll be in a better position to determine whether this is something you can deal with on your own, or if you’d benefit from consulting with a tax pro, especially during your first year of self-employment.

Either way, self-employment offers a level of freedom and flexibility typically not found with a 9-5, so if you’re in a position to strike out on your own, do so!

Just don’t forget about those pesky self-employment taxes.