2013 Tax Tips for Teens – How to Report Part-Time Income

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Entering labor force for the first time is very exciting… especially for teens looking into an opportunity to earn some money over the summer or after school. Depositing the first paycheck is rewarding but what you may be unaware of is the flip side of making money: taxes.

Parents should take very serious interest in their kids first steps into the workforce. Besides teaching kids work ethics and how to be a good employee, it is equally important to educate them on taxes and how to handle them.

When do teens have to pay taxes?

In majority of cases you teenagers are treated as dependents and appear on parents’ tax returns and don’t need to file taxes. This changes once certain earning thresholds are met. For income generated in 2012 those thresholds were:

  • Unearned income (dividends, interest from bank accounts or bonds, alimony) – $950.
  • Earned income (wages) – $5,950.
  • Gross income (earned + unearned) greater than $950 or earned income greater than $5,650 plus $300.

As long as those numbers stay below thresholds, parents can include dependent child’s income on their tax return. Publication 929 offers very handy worksheets and examples to determine who has to file taxes (child vs parents) and the amounts that have to be reported.

What should teenagers know about tax forms?

Just like adults, teenagers can expect to deal with basic tax forms related to employment. Parents should help them understand the following:

  • W4 Personal Allowance Worksheet – Document you fill out when you get hired; very important because it will determine the amount of withholding based on filing status and allowances you claim.
  • W2 Wage and Tax Statement – Summary of your earnings for a year; you will receive it in January and it will include details on total income, taxes withheld, and Social Security and Medicare contributions.

It is also important to know how the employer treats a teenager for tax purposes. There are different tax consequences if the kids are a typical W2 employee or 1099 contractor (independent contractors). Summer jobs, because temporary may be offered as contractor jobs and may appeal to teenagers because paychecks are relatively bigger. There are no withholdings and a teen pockets a gross amount. W2 employees have different taxes withheld making this option less appealing. The problems come when it’s time to report taxes and teens earned more than $400. In that case, regardless of the gross earnings, the teen has to pay self-employment taxes, which means cash outlay. Teen would be responsible for the employer’s portion of Social Security and Medicare tax payment. On the other hand, having your taxes withheld as a W2 employee can often lead to a refund and a pleasant gift in April.

Develop a routine

Habits are difficult to change so teach your teenagers the correct approach from the beginning. Don’t have them wait until the last moment to file taxes and stress the importance of having tax records organized. It will be easier to answer all the questions during the tax season and will reduce potential stress. In case of an audit, no one will have to scramble to provide documents to the IRS. Setting that routine in place will come very handy in the years to come.

Helpful links

 

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