In a few days the wheels on the bus will stop going ‘round and ‘round, because school’s out for summer! Which means in a few days we’ll start hearing “I’m bored!” and “I need money!” Maybe this is the year your teenager decides to fight boredom and earn some cash by getting their first job. If so, you can help them understand how taxes will affect their paycheck.
One of the first tasks teens will face upon being hired will be filling out Form W-4, the Employee Withholding Allowance Certificate. This form guides the employer in withholding the correct amount of federal and state tax. The form’s instructions can be a bit confusing to those just becoming acquainted with taxes, so it might be helpful to use the IRS’s interactive W-4 calculator found here. (Because of the many changes to the tax law, it’s not a bad idea for mom and dad to use the calculator to check if their withholding is still correct. Updated for 2019 - using the Withholding Calculator is still good advice!)
Most teens who work summer jobs will continue to be dependents on their parents’ return. This means students who do not make more than their standard deduction will not be subject to federal income tax. States have their own standard deduction. Often, as is the case with North Carolina, the state’s standard deduction is lower than the federal amount. Please note, there are different rules for dependents who have unearned income, such as interest from bank accounts or earnings from investments held in their name.
If you are certain your child will not earn enough to have a tax obligation, you may suggest they mark the W-4 as “Exempt” from withholding. This should only be done if the taxpayer had no tax obligation the previous year and will not have a tax obligation this year. Doing this will eliminate the need to file a tax return just to get back money that was needlessly withheld. However, most people prefer to be safe and ask for some money to be withheld for federal and state taxes.
Regardless of what you decide to do about income tax withholding, every paycheck will have deductions for Social Security and Medicare taxes, or FICA. The employee’s share of these taxes is 7.65%. (The employer is also paying the same amount on behalf of the employee.) Remember the Friends episode when Rachel was surprised by her first paycheck? Help your teen understand that FICA taxes will be withheld so they won’t be disappointed when they see their first check!
Instead of being an employee, some teenagers work jobs that classify them as an “independent contractor.” Instead of having their wages reported on a W-2, they will receive a 1099-Misc reporting their pay. If this is the case, they will be subject to Self Employment (SE) tax if their net earnings (total pay minus qualified expenses) exceed $400. The SE tax is 15.3% of earnings because it represents both the employer’s and employee’s shares of FICA. Anyone who is self -employed is also subject to SE taxes, and anyone subject to SE taxes must file a tax return, even if their earnings are too low to have an income tax obligation.
The IRS classifies babysitting and lawn mowing as “household help” and does not require SE taxes regardless of income level if the worker is under 18 years old. Interestingly, they also include newspaper carriers in this classification. It seems as if the IRS is encouraging students to work by making this exception for traditional teen jobs!
The IRS has a page of tips for teenagers working summer jobs on its website. Of course, Down South is just a phone call away if you have any questions about the tax implications of your child’s summer job. Just don't let them work so much they don't enjoy the summer break. After all, the first day of school is only a couple of months away!
