You’re overjoyed that your teen will be earning money this summer. Yes, and so is your kid.
However, the tax implications should be taken into account when the young worker begins their first day of paid job.
The first paycheck that a young worker receives might be an excellent introduction to one of the few constants in life. The following is information that they and their parents need to know about their initial interaction with the Internal Revenue Service (IRS).
The following are the most prevalent tax problems that young workers and their parents have to deal with:
It’s likely that the teen will have to file a tax return of some kind.
When it comes to paying taxes, the United States tax code is remarkably fair to everyone. Anyone above the age of 18 with a particular level of income must file a tax return.
Anyone who expects to earn more than the annual standard deduction in 2022 must file Form 1040.
Parental assumptions that their child’s income can be included to their own tax return are likely to be disappointed. This tax break is available for the unearned investment income of certain minors only. The real earner, even a dependent child, must record all taxable earned income.
Many teenagers won’t have enough income in April to have to file a tax return since they won’t make the almost $13,000 threshold. Except in cases when the teen has their own business and makes more than $400 per month.
Minimum taxable self-employment earnings are lower than minimum taxable wages.
Your average teen’s efforts to earn $401 through tutoring, pet sitting, and general errand running should exceed your expectations.
And it means young entrepreneurs will need to file to pay self-employment (SE) taxes even if they won’t make enough money this year to warrant a 1040.
A strong urge exists to disregard this submission. However, do not.
To start, your kid will be in violation of the law regarding taxes. Second, the child’s future Social Security and Medicare benefits will be affected by the filing.
It will be easier if records are kept well from the start.
Taxpayers who have been filing for a while know that having organized documents makes it much simpler to comply with tax regulations. This is a valuable lesson for anyone starting out in their careers.
For individuals who worked for themselves over the summer, this is especially relevant. The young entrepreneur needs to keep track of their income and costs in order to calculate their potential taxable income.
Self-employed individuals of any age can get a sense of the information the IRS requires and the deductions that can be claimed by perusing Schedule C of Form 1040. Schedule SE will be used to report and calculate the aforementioned self-employment taxes.
If the young business owners keep meticulous records of their revenue and expenditures, tax time next April should go more smoothly for them.
Young workers would also benefit from complete records when deciding whether to make anticipated tax payments. The equivalent of paycheck withholding for independent contractors. Generally speaking, taxpayers who anticipate owing the U.S. Treasury more than $1,000 are required to make anticipated tax payments, typically every three months.
Summer pay will be reduced due to withholding taxes.
Young wage earners have less tax preparation to do. Important tax planning for this scenario should be done prior to the start of the project.
Your company will ask the young worker to fill out a W-4 tax form. The employer will use this data to calculate how much tax to deduct from each new hire’s income this summer.
If your annual income is more than $12,950 and you are required to file a tax return, then 10% of your income is subject to taxation. In January of 2019 you will receive a W-2 form detailing the amount of taxes withheld.
The W-2 will be required while completing the 1040 tax form. The only method to receive money back from the government if you had too much tax withheld is to file a tax return.
Fund your retirement account with your salary.
Like workers of all ages, young people will certainly want to spend some of their summer earnings on fun activities. Since I lack parental experience, I’ll let the family decide how much money the child can spend on gifts and entertainment.
However, I would recommend that the young worker be urged to start saving for retirement at that time. Even as someone without children of their own, I am aware of how challenging it can be to convince younger people of the necessity of retirement savings.
For most young employees, a Roth IRA is the greatest retirement savings vehicle. Even if the kid didn’t make enough to owe taxes, the after-tax contributions will grow tax-free for decades. In 2022, a young worker can put in as much as $6,000, up to their earnings for the year.
Initiating contributions right away is one approach to increase the allure of the IRA choice. A young worker’s Roth IRA can be funded with a gift of nontaxable cash from anyone, including their parents, grandparents, other relatives, or even people who aren’t connected to them. The teen can keep all of the money earned during the summer.
Then, after the novelty of having a job wears off, the young person can start saving for retirement with their future wages.
Allowing your child to earn their own money from a young age can have significant long-term rewards. However, the tax consequences of making this revenue may be tough for you to deal with. A financial advisor can assist you and your entire family with tax planning. Feel free to contact Credo to learn more about the financial advantages and tax considerations for summer jobs for teens.
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