Summer Employment

Did your high school or college student get a job this summer? Is she working at a summer camp? Is he doing yard work? If you have a working teen or student, there are tax implications to consider.

Your working youngster is still your dependent. However, the student could still be obligated to pay both federal and state taxes depending on the level of income both earned (from work performed) and unearned (usually interest and dividends). For 2012, a single dependent, your working child, can have a total income up to $5,980 without paying taxes.

When beginning employment, the student will be asked to complete a W-4. The W-4 tells the employer if taxes should be withheld from the employee’s wages. The level of withholding is determined from the number of allowances claimed. Each allowance claimed lowers the amount of taxes withheld.

The student must first estimate the total amount he will earn in the year. This includes wages from this summer employment and any other wages anticipated from part time work. If the student is sure that the wages (plus interest and dividends from accounts in his name) do not exceed $5,980, the student may claim to be exempt from withholding. The exemption can not be claimed if interest and dividends exceed $300 and total income exceeds $950. In today’s environment of low interest rates, very few students have interest and dividends which exceed $300. (Remember interest and dividends from 529 accounts and retirement accounts are not included in total income).

If the student will be exempt from withholding, the W-4 identification info is entered and EXEMPT is written in box 7. The comparable NY form is IT2104-E. It is to the teen’s advantage to claim the exemption. No income taxes will be withheld and no tax return will be required. If taxes are withheld and the teen does not exceed the $5,980, he will have to file a return to get a refund of the withheld taxes.

If the student is not exempt, the form should be filled out claiming 1 allowance. If the student has multiple employers, it is best to file with 0 allowances to ensure adequate withholding. The comparable NY form is IT2104.
W-4 form: http://www.irs.gov/pub/irs-pdf/fw4.pdf
NY IT2104-E: http://www.tax.ny.gov/pdf/current_forms/wt/it2104e_fill_in.pdf
NY IT2104: http://www.tax.ny.gov/pdf/current_forms/wt/it2104_fill_in.pdf

Suppose your student is self-employed. He can earn up to the same $5,980 without owing federal income tax. However, if his net income (receipts less any expenses) is above $400, he must pay self-employment tax. Self-employment tax is the way the self-employed make their contributions to social security and Medicare. If self-employed, the teen must keep accurate records of receipts and expenses which will be used to prepare his tax return.

The IRS gives tax relief to teens working traditional part time jobs. If your teenager (under 18 at any time during the year and a student) is working as a household employee, he will not owe self-employment tax. A household employee is a housekeeper, babysitter, tutor, gardener, and others who work in or around a private residence. However, being exempt from self-employment tax does not mean the teen is exempt from income tax.

Your working teen will receive a W-2 (from an employer) or a 1099-MISC (if worked as contractor). If self-employed, he should be able to compute his net income. His total income (earned and unearned) should be calculated to determine if a tax return is required. A tax return must be filed for your working teen if he has exceeded the income levels or if he hasn’t but has had taxes withheld.

A teen’s first job can be exciting and is certainly a learning opportunity. Becoming familiar with the responsibilities of a working taxpayer is no small part of the experience.

IRS Circular 230 Disclosure
Pursuant to U.S. Treasury Department Regulations, we are now required to advise you that any federal tax advice contained in this communication, including attachments and enclosures, is not intended by the Sender or Sandra G Johnson, CPA, P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.