The potential tax pitfalls and benefits of your kid's job
It can be a shock for teens working a summer job to get their first paycheck and realize there's a huge chunk missing. Such is the reality of income taxes, as all adults know.
Some student workers, though, may be exempt from federal income tax withholding. During tax year 2013, single students who are expected to earn less than $1000 in investment income could be exempt from income tax withholding if their expected total income for the year (earned and unearned) does not exceed $6,100 (the standard deduction for a single person under age 65 and not blind). The student worker will be asked to fill out a form W-4 claiming exemption if they qualify.
If the student earns tips, he'll have to file reports with the employer for any amount totaling $20 or more in a month. The employer is required to withhold tax on reported tips. Whether or not tips must be reported to the employer, all tips must be included as income on income tax returns.
For federal income tax purposes, if investment income doesn't exceed $1000 and total income doesn't exceed $6,100, the student won't have to file a federal income tax return. If investment income exceeds $1000, then he will. If the employer withholds taxes, the student will want to file a return if a refund is due.
Students and parents should keep in mind that the lesser of 100 percent of earned income or up to $5,500 can be contributed to a traditional or Roth IRA.
Putting Your Kids to Work
If you happen to own a business and you have work suitable for your teenage children, you may want to take advantage of the opportunity to employ them.
First, there are rules that may exempt you from withholding certain federal taxes (Social Security, Medicare and federal unemployment) from your children's wages. Second, you can deduct these wages as a legitimate expense, reducing the taxable income for your business. Since we're talking about earned income, you save both on income tax and self-employment tax. Third, your child likely will pay no tax or will pay at a lower rate than you as a parent would. Remember that the work must be legitimate, performed for your trade or business, and comply with any applicable state and local employment laws on child labor. Also, the pay must be reasonable for the type of work involved.
Tax laws and regulations change (the rules above apply to tax year 2013). Always consult a tax professional for advice.
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