Summertime is here, and many students and teenagers get summer jobs to earn extra spending money to pay for gas, save for a car or to put money aside for their next semester. Parents, Jeffrey Schneider, EA, CTRS, NTPI Fellow, offers some tips to keep in mind and to help educate your children about their tax requirements:
Withholding and Estimated Tax. Students and teenage employees normally have taxes withheld from their paychecks by the employer. If they did not have a tax in the prior year or do not to expect to owe in the current year, they could be exempt form income tax withholdings (not social security of Medicare). Some workers are considered self-employed and may be responsible for paying taxes directly to the IRS. One way to do that is by making estimated tax payments during the year.
What is an estimated payment? Taxes must be paid as you earn or receive income during the year, either through withholding or periodic tax payments. If the amount of income tax withheld from your salary is not enough, or if you receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes, and awards, you may have to make estimated tax payments. If you are in business for yourself, you generally need to make estimated tax payments. Estimated tax is used to pay not only income tax but other taxes such as self-employment tax and alternative minimum tax (though teenagers are not usually subject to this tax due to their income levels). If you don’t pay enough tax through withholding and estimated tax payments, you may be charged the underestimation penalty. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return.
New Employees. When a person gets a new job, they need to fill out a Form W-4, Employee’s Withholding Allowance Certificate. Employers use this form to calculate how much federal income tax to withhold from the employee’s pay.
Self-Employment. A taxpayer may engage in types of work that may be considered self-employment. Money earned from self-employment is taxable. Self-employment work can be jobs like baby-sitting or lawn care. Keep good records of money received, and expenses paid related to the work. IRS rules may allow some, if not all, costs associated with self-employment to be deducted. A tax deduction generally reduces the taxes you pay.
Tip Income. Employees should report tip income. Keep a daily log to accurately report tips. Report tips of $20 or more received in cash in any single month to the employer.
Payroll Taxes. Taxpayers may earn too little from their summer job to owe income tax. However, most if not all workers are subject to Social Security and Medicare taxes and these are withheld from their pay. If a taxpayer is self-employed, then Social Security and Medicare taxes (times two, which is called the self-employment tax) may still be due (see below) and are generally paid by the taxpayer, promptly.
Newspaper Carriers. Special rules apply to a newspaper carrier or distributor. If a person meets certain conditions, then they are self-employed. If the taxpayer does not meet those conditions and is under age 18, they may be exempt from Social Security and Medicare taxes.
My child is a newspaper carrier, what do we have to do?
As a newspaper carrier, your son may be a direct seller liable to pay self-employment tax. A direct seller is someone who satisfies the following conditions:
The person is engaged in the trade or business of delivering or distributing newspapers or shopping news, including directly-related services such as soliciting customers and collecting receipts;
Substantially all of the pay for these services (whether or not paid in cash) directly relates to sales or other output rather than to the number of hours worked;
The person performs these services under a written contract that states that the individual won’t be treated as an employee for federal tax purposes.
- ROTC Pay. If a taxpayer is in a ROTC program, active duty pay, such as pay for advanced summer camp, is taxable. Other allowances the taxpayer may receive may not be taxable. Check with Jeff or your tax professional about this.