Your Teen, a Summer Job, & Taxes: What You Need to Know

When your teen joins the workforce, it can be a rewarding experience for both you and your teen. They gain some financial independence and learn some life lessons, and you as a parent have the opportunity to guide them through those lessons.  However there are some potential daunting tax issues that both the parents and the teen could face. Here are some tips to help everyone make it through.

Filing a Return

It’s true, the IRS always “wants a piece” no matter what age someone is, but the amount of income and type of income are factors to consider when filing a return.   There is a case where your teen may not need to file at all.  A single person is not required to file a return if their income is below the standard deduction ($12,200 for 2019).  If your teen does not expect to earn more than $12,200 during the summer, they will not need to file a return.  However, if the employer is withholding federal and/or state income tax, the teen will need to file a return in order to have their tax withholding refunded.  Filling out the W-4 (and state equivalent) is very critical when starting that new job.  The teen can select “exempt” on the form, and not have any income taxes withheld, thus alleviating the need to file the return.  Please note that states may have different income thresholds.  Parents, you may decide it is good life practice for teens to have the tax withholding and file the tax return, especially if there is potential for a return filing requirement due to unearned income (see below).   The IRS has a tool that can help determine if a tax return must be filed – Do I Need to File a Tax Return.

Employee vs. Independent Contractor

The discussion above assumes that your teen has been hired as an employee and will receive a W-2. However, some employers may choose to classify your teen as an independent contractor, and then they will receive a 1099-MISC.  In this case, even if your teen earns less than $12,200, a tax return is still necessary.  As an independent contractor, the teenager must pay the self-employment tax by filing a Schedule SE with their return.   They may not owe any income tax, but they will still need to pay the self-employment tax.  Self-employment tax is the employer and employee share of Social Security and Medicare tax payments.  Anyone who earns more than $400 of self-employment income must file a tax return and pay the self-employment tax.

Other Issues

Another issue that complicates filing a return is unearned income – interest, dividends, and capital gains.  When unearned income reaches a certain amount for a child, generally, the child must file and pay taxes. Even if your teen’s income is under the $12,200 standard deduction, they still may have to file. Please consult your tax advisor regarding the filing requirements if your child has investment income.

If your teen does need to file a return, most of the tax return software companies will offer free preparation for simple returns, in addition to the option of filing via the IRS website.

You may ask “How does this affect my return”?  Filing a separate return for your teen does not preclude you from claiming them as a dependent on your tax return.  The teen should also be sure to check that someone else can claim them as a dependent on their tax return, in order to avoid e-filing issues with the parents’ return.

Having a summer job can be an educating experience about handling money.  One way you can teach your kids about financial responsibility is by having them contribute to a retirement account.  Since your teenager now has earned income from a summer job, we recommend opening a Roth IRA, as Roth’s require earned income.  Even a small amount now can grow into a substantial tax-free retirement nest-egg. 

In addition to the above, there can be other nuances to having your teen file a return. If you have any questions, please contact us for additional information.

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