Once school is out, teenagers head to summer break. For many of these young people, that means a summer job to earn cash for things such as a car, clothes or simply spending money. If you have a working student in your life, consider these six tax tips to be in a better financial position.
Each working student fills out a state and federal W-4 form so employers know how much money to withhold from paychecks for income tax payments. Estimate how much your child may make over the summer, and compare that to the minimum amount he needs to make before filing his own return. The Medicare and Social Security taxes are taken out of a paycheck no matter how much else you want to withhold. A portion of the money withheld from each paycheck may come back as a refund on an income tax return filed in the spring.
You can still claim your child as a dependent on your income tax return up to age 19, or age 24 if a full-time student, if you provide more than half of the person's financial support. Support means food, clothing, housing and vehicle expenses. Claiming your working student as a dependent, even if he makes money, lowers your income tax liability at tax time.
3. Independent Contractor
Your teen's employer may choose to classify him as an independent contractor rather than an employee. You should set aside money equivalent to the Social Security and Medicare tax payments, plus any income tax payments and self-employed taxes, to pay once you file taxes in April. Your working student has to earn $600 or more to receive a 1099-MISC form outlining the wages earned.
4. Out-of-State Jobs
Some states require income taxes to be filed for the state where the job occurred. As an example, suppose you live in Illinois but your daughter works as a camp counselor in Missouri. Your daughter may have to file a Missouri income tax return even though you reside in Illinois. Find these forms online or through tax preparation software.
5. Your Child as an Employee
You gain several tax benefits by employing your child during the summer months. Wages you pay to your child are not subject to Social Security or Medicare taxes, plus your working student's wages are deductible as a business expense so long as your teenager is treated similar to a regular employee.
Although it may seem a bit early to start thinking about retirement, setting aside a little extra money into an IRA represents one of the best hidden tax tips for young people. The longer the interest compounds, the more money your teenager has for retirement in another 50 years.
The tax implications of a working student can become complicated depending on your situation, and these are just six basic scenarios that might occur. Know your tax laws to get ahead of the game before your teenager starts working so you can prepare for tax time every spring.
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