Posted by The TaxAdvocate Group, LLC

Tax Tips Your Teenage Must Know

Tax Tips Your Teenage Must Know

For many teenagers, the summer job is like their rite of passage. And paying taxes are considered a regular part of life and is learned by many teenagers in a hard way. As a parent, don’t forget to consider whether or not your teenager owes money to the IRS as well as you gather documents to file your own taxes. 

Does your teenager owe taxes too?

A teen doesn’t have to file a tax return generally if he or she is dependent of another taxpayer. Unless if they have their unearned income (such as interest and dividends) is over $950, their gross income is more than $950,  their earned income is over $5,950, or earned income (up to $5,650) plus $300. 

To see if your teen is below the standard deduction amount, always check your teen’s earnings for the year. Your teen won’t even need to file an income tax return in most cases if they are. 

The right employee designation should be chosen carefully 

The way your teen is classified by the employer should be paid attention to. Rather than as ‘regular’ W-2 employees, some employees like the idea of hiring summer help as contractors. For the employer, hiring contract workers come with few paperwork and tax complications. 

Since this arrangement doesn’t have any withholdings from their paychecks, teenagers find this appealing. Payroll taxes and even federal taxes can be withheld from the paycheck when a teen is a W-2 employee. To teenagers, the fact that federal taxes come back as a refund is not acknowledged by many. Since the paychecks are often bigger, being a contractor seems like the best way to go. 

Unfortunately, during tax time, being a 1099 contractor can come with extra headaches. A teenager should pay self-employment taxes if he or she makes more than $400 as an independent contractor. So, your teen will have to file a return and pay self-employment tax even if your teen doesn’t make enough to owe federal income taxes. 

Realize what seems like the best idea for a summer job might not be as attractive when tax time comes so always consider the implications of different types of employee classification. 

Teenagers Special Tax Rules

For teenagers doing certain jobs, there are some special cases for them. 

Payroll or self-employment taxes should not be worried by household employees under the age of 18 unless if they are in the business or trade of that job. This means that for jobs that include mowing lawns and babysitting, there are some exceptions. For teenagers under the age of 18 and if they deliver newspapers can also get a self-employment tax exemption. 

You also don’t have to worry about payroll taxes if you are going to hire your teen for work in your sole proprietor family business. But, you have to be extra careful at all times. Because even in the family business, everything will change and withholdings become important once you pay your teenager enough to hit the standard deduction for filing. 

The Kiddie Tax

The importance of investing is mostly taught by many parents to their children. However, just like it is for adults, unearned income for teenagers is subject to different rules than earned income. Your teen has to file a tax return and report if her or his investment income reaches a certain level (for the tax year 2012, it is $950). 

Generally taxed at 10% is what will happen to money above that level. However, $1,900 for 2012 is another threshold that is in effect as well. Your child’s unearned investment income is taxed at your marginal rate once this second threshold is reached. 

Your child will be eligible for an IRA if he or she has earned income. For that income to grow tax-free, it might make sense to hold some of the investments in a Roth IRA.

State Taxes should never be forgotten!

It is very important to remember that each state has its own income tax rules and requirements even if you are covered with regard to federal taxes. Make sure that your teen is in full compliance after you will look into your individual state tax law. 

Remember that learning about filing taxes is never too early!

The TaxAdvocate Group, LLC
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