Ready to start that first summer job at your Main Street ice cream parlor or that summer camp on the Susquehanna? The tax and accounting people at Wolters Kluwer have put together some tips for teenagers and their parents about summer jobs and taxes.
The good news is many employers in the midstate are looking for summer or seasonal workers, especially at entry-level positions, so teens should find lots of job opportunities. Earning money, however, also means paying taxes.
Taxes are complicated and there are lots of them. Tax issues vary depending upon whether you work as an employee or are self-employed, or whether you are still a dependent on your parents’ tax return. Ten things to consider:
- Working as an employee for a business will generally require completing a Form W-4 that tells the employer how much to withhold from your wages for income, Social Security and Medicare taxes – yes, you may be a teen but you’re helping keep oldsters afloat and sowing the seeds for your own retirement, gasp. Your earnings will be reported to the Internal Revenue Service (IRS) on Form W-2. You’ll find out more about that next January.
- OK, so that was just the feds. Pennsylvania has an income tax that requires additional withholding too, and so does Maryland, if you live close enough to work across the state line. And don’t get us started on local earned income taxes …
- You could be an employee for more than one business. For example, if you hire yourself out to a few different businesses, you may be what’s called an independent contractor. That means a totally different form, W-9, for some businesses, and you also might have to pay estimated taxes four times a year instead of just having them withheld from your paycheck. Some of your earnings may be reported to the IRS on Forms 1099, but your earnings are generally taxable whether reported to the IRS or not.
- Now for some good news (but see the next tip for a caveat): For federal taxes, the standard deduction for 2021 is pretty high, $12,550 for 2021. It’s a lot of scooping ice cream to make that much. So many teenagers may not owe income taxes unless they earn over that amount …
- … or have other investment income. That’s right: what’s called unearned income, money from investments for example, will require still require paying income taxes at lower income levels and it may trigger the Kiddie Tax, where part of the unearned income is taxed at the parents’ tax rate. You can talk to them about that.
- Even teenagers who do not owe income taxes may be subject to Social Security and Medicare taxes unless they are under 18 and in certain exempt jobs, such as a family business, mowing lawns, babysitting or making deliveries.
- Been there before? If you didn’t owe taxes last year and don’t expect to owe taxes this year, you may be exempt from income tax withholding. You can indicate this on your W-4.
- Oh noooooo! Income earned from tips is also taxable! You must report the amount to your employer if the total is over $20 in a month. And we’re sure you’re hoping it’s way more than that.
- You and your parents should monitor summer earnings to determine whether you still qualify to be a dependent on the parents’ tax return. That’s their problem, really, not yours. But even if you are not required to file a tax return for the year, there may be reasons to do so, for example, if you want to get a tax refund or qualify for the American Opportunity Tax Credit for education expenses. You may even qualify for the refundable Earned Income Tax Credit in 2021 if age 19 or older.
- And finally, a summer job can provide the earned income necessary to contribute to a Roth IRA – that’s a retirement account. And get this: The parents can fund that, rather than using the teenager’s hard-won earnings. See if they’ll go for it.