With many teenagers starting summer jobs in a few weeks, it’s important that have a basic understanding of how the tax code works.
Uncle Sam will consider the majority of earnings made over the summer as taxable income, including bonuses and commissions. For those with a job waiting tables or other employment that includes tips from customers, those tips are also taxable income. Workers making more than $20 per month in tips, must report the amount to the employer so the taxes can be calculated and withheld. Tips either come in cash or added to the charge slip, workers and employers need to make sure both types are being recorded and calculated.
According to the IRS, teenagers making money from self-employment such as mowing lawns, designing websites, or babysitting, must pay tax on those monies and will be required to file a tax return if the earnings exceed $400. It’ not likely teenagers in this position will owe any income tax, but they will be required to pay self-employment tax, which funds Social Security and Medicare accounts.
Self-employment tax is computed at 15.3% of the profit, and kids can deduct any business expenses from the profit before paying the self-employment tax, so they should learn what expenses qualify as deductions. The IRS states that all “ordinary and necessary” business expenses can be deducted. Here are a few examples to help make determinations:
- You babysitting for a family and you decide to take the kids to an amusement park at your expense. The amount you pay for admission, refreshments and other costs for the kids that aren’t reimbursed by their parents can be deducted as well as mileage if you drove them to and from in your own car.
- You mow lawns and garden for your neighbor and at the end of the summer, you buy him an azalea bush as a gift. This is a valid business expense.
- You design websites and needed to buy a laptop and special software. You may be able to deduct only a portion of the laptop if you did not use it 100% for business and you can write off the full cost of the software.
There may be a few employers who will want to hire summer workers as independent contractors, which means they will be considered self-employed and no taxes will be withheld from pay and at the end of the year workers will receive a Form 1099 rather than a W2.
The independent contractor label may not be appropriate for summer workers. The label might make it more expensive to the summer employees because they are not only paying their share of the taxes, but also paying what the employer would normally be responsible to cover.
For example, it would be appropriate for a teenager designing a website for the local ice cream store to be labeled an independent contractor, but for someone working for a company offering the same services it provides to their customers – like being a counter person at the ice cream store- then the IRS requires getting paid as an employee. The employer is required to pay into Social Security and Medicare accounts at a rate of 7.65% of the wages. For a teenager who really wants the job, but the employer refuses to put him or her on payroll, negotiate a higher pay rate to compensate for the additional taxes.
There are very few exceptions to earning income that would be considered nontaxable. One example is if someone is in the ROTC and participated in advanced training, the subsistence allowance you received is not taxable. However, active duty pay, such as pay received during summer advanced camp, is taxable.
For more information on taxable versus nontaxable income, check out IRS Publication 525 Taxable and Nontaxable Income. Students should browse Tax Information for Students and Publication 501 to determine whether a tax return needs to be filed.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.