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.
Tuesday, June 19, 2012
Monday, May 14, 2012
Lobbying on Capitol Hill
Sandra Johnson, president of Sandra G. Johnson, CPA, P.C. was part of a group representing the National Conference of CPA Practitioners that met with representatives of the Senate, Congress and the Internal Revenue Service to lobby for tax law changes.
On the agenda was the AMT. Originally designed to tax only the wealthy, AMT now affects middle-class taxpayers living in high cost-of-living areas like the east and west coasts. Among other topics, the organization was looking to effect a change in the deductibility of health insurance premiums for small business owners and sought to increase the deductibility of Long Term Care insurance premiums for taxpayers.
Sandy’s participation in these conferences reflects her commitment to her profession, small businesses and individual taxpayers.
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.
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Tuesday, March 13, 2012
Is IRS’s Fresh Start for You
The IRS wants you to voluntarily file your tax return and pay your taxes. Recognizing that taxpayers may be struggling, particularly those who have experienced unemployment, the IRS has introduced a program to eliminate “failure to pay” penalties. Additionally, the IRS has changed some payment options to encourage taxpayers to meet their tax obligations.
All taxes on 2011 income are due on April 17, 2012. If not paid on time, the IRS levies a “failure to pay” penalty. This penalty is a half percent per month with a cap of 25 percent. Under the “Fresh Start” program, a taxpayer may receive a six month extension for payment of taxes due with no “failure to pay” penalties being assessed during the six months. Interest on the tax due will accrue over the extension period.
The taxpayer must meet the following criteria to be eligible for the extension and penalty relief.
• The 2011 tax liability must be less than $50,000, and
• The adjusted gross income must be less than $100.000 for single ($200,000 for married filing jointly), and
• The taxpayer or spouse must be a wage earner who was unemployed for 30 consecutive days between January 1, 2011 and April 17, 2012 or self-employed whose 2011 income decreased by 25% or more as compared to 2010 business income.
To receive the extension a new form must be filed (Form 1127-A) by April 17, 2012.
Getting the extension will give you some breathing room, but the taxes still have to be paid. Part of the IRS Fresh Start program is an expansion of the installment payment plan, Tax liabilities of up to $50,000 may be paid via installments, the payment period has been expanded to 72 months, and the financial information required to qualify for an installment payment plan has been streamlined based on tax liability level.
The IRS also has more flexibly with its “Offer in Compromise” program. An Offer in Compromise is an agreement between the IRS and the taxpayer that settles the tax liability for an amount less than owed. The IRS looks at the taxpayer’s financial situation to determine what amount of the liability can be paid.
Although you may be struggling due to unemployment or reduced self-employment income, you are still obligated to file a tax return and pay your taxes. If you can’t pay, do not skip filing. The penalties (failure to file and failure to pay) will make the burden worse. The IRS Fresh Start program may help with payment extension, penalty relief, and payment plans. Our office can determine your eligibility and develop a plan for you to meet your tax obligations.
All taxes on 2011 income are due on April 17, 2012. If not paid on time, the IRS levies a “failure to pay” penalty. This penalty is a half percent per month with a cap of 25 percent. Under the “Fresh Start” program, a taxpayer may receive a six month extension for payment of taxes due with no “failure to pay” penalties being assessed during the six months. Interest on the tax due will accrue over the extension period.
The taxpayer must meet the following criteria to be eligible for the extension and penalty relief.
• The 2011 tax liability must be less than $50,000, and
• The adjusted gross income must be less than $100.000 for single ($200,000 for married filing jointly), and
• The taxpayer or spouse must be a wage earner who was unemployed for 30 consecutive days between January 1, 2011 and April 17, 2012 or self-employed whose 2011 income decreased by 25% or more as compared to 2010 business income.
To receive the extension a new form must be filed (Form 1127-A) by April 17, 2012.
Getting the extension will give you some breathing room, but the taxes still have to be paid. Part of the IRS Fresh Start program is an expansion of the installment payment plan, Tax liabilities of up to $50,000 may be paid via installments, the payment period has been expanded to 72 months, and the financial information required to qualify for an installment payment plan has been streamlined based on tax liability level.
The IRS also has more flexibly with its “Offer in Compromise” program. An Offer in Compromise is an agreement between the IRS and the taxpayer that settles the tax liability for an amount less than owed. The IRS looks at the taxpayer’s financial situation to determine what amount of the liability can be paid.
Although you may be struggling due to unemployment or reduced self-employment income, you are still obligated to file a tax return and pay your taxes. If you can’t pay, do not skip filing. The penalties (failure to file and failure to pay) will make the burden worse. The IRS Fresh Start program may help with payment extension, penalty relief, and payment plans. Our office can determine your eligibility and develop a plan for you to meet your tax obligations.
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