High school and college students hoping to find temporary jobs may be in for a tough time this summer -- once again -- as they compete with older, more experienced workers in a still-struggling economy. That's bad news not only because of lost income, but because summer jobs provide valuable work experience that can help pad their resumes.
I'll share a few job-hunting suggestions below but first, if your kid is fortunate enough to find work, there are a few things he or she -- and you -- should know about the economic and tax ramifications of temporary employment:
Payroll deductions. If this is their first job, warn your kids about common payroll deductions that can take a big bite out of take-home pay. Common culprits include state and federal income taxes, Social Security and Medicare (FICA), health and unemployment insurance, uniforms and union dues.
When starting a new job your child will be asked to fill out IRS Form W-4, the Employee's Withholding Allowance Certificate. Employers use this form to determine how much income tax should be withheld from your paycheck. The form's instructions help determine how many personal allowances can be claimed; the IRS also has a helpful online Withholding Calculator.
Note: If you claim your children as dependents and they earn less than $5,950 during 2012, they probably won't owe any income tax for the year. If so, they can request that employers not withhold income taxes by claiming an "exemption from withholding" on Line 7 of the W-4. However, if you notice on their year-end W-2 form that the employer did indeed withhold federal and state income taxes, your child must file a tax return in order to get a refund. The 1040EZ Form is a simple, one-page form that usually applies for kids.
Self-employed status. Many teens start their working careers by being self-employed, doing part-time jobs like babysitting, yard work or housekeeping. It's important to know that this income is also subject to income tax. (Special rules apply to newspaper deliverers.)
If their self-employment net earnings exceed $400 in 2012, your kids also must pay self-employment tax, even if they owe no income tax. This tax is similar to the Social Security and Medicare taxes that get withheld from regular wages. Self-employment tax is assessed at 13.3 percent of net self-employment income reported. It can be calculated on Form 1040, Schedule SE.
The IRS provides a handy Taxable Income for Students guide that explains which types of income are and are not taxable. For example, tips, bank account interest and certain scholarship-paid expenses (such as room and board) must be reported as taxable income. Another good resource is the Department of Labor's Seasonal Employment website, which outlines safety and other occupational rules employers must follow for employees under age 18.
IRA contributions. Retirement is probably the last thing on your teenager's mind, but you should know that they are allowed to open and contribute earned income up to $5,000 to an IRA each year. If you or the grandparents want to make a down payment on your kid's future, consider funding an IRA. For teens, it usually makes sense to open a Roth IRA as opposed to a traditional IRA. Here's why:
With a Roth, you pay tax on the contributions that year -- and kids are usually in the lowest tax bracket. Then, contributions and investment earnings grow tax-free forever. With a traditional IRA, you make pre-tax contributions but pay income tax on withdrawals at retirement -- usually at a much higher tax rate.
If someone opened a Roth IRA at age 16 and contributed only $1,000 a year, the account could be worth over $300,000 by age 60. Sit down with your kid and play around with this Roth IRA Calculator -- it's a great way to teach the importance of compound earnings.
- Summer Jobs+, a coalition of businesses, nonprofits and the Department of Labor created to provide employment pathways for low-income and disconnected youth.
- USAjobs.gov has a dedicated site to help students and recent graduates find jobs in the federal government.
- CareerOneStop is another good government-sponsored program with a youth-oriented program that has advice on identifying work interests, how to get workforce credentials, and more.
- Snagajob, which posts part-time, seasonal and summer jobs.
- Care.com, which matches babysitters, tutors, pet sitters and others with families looking for caregivers.
- Teens4Hire, which posts job opportunities for young adults (14 and over).
- Coolworks.com, which posts seasonal jobs at exotic locations, including national parks and summer camps.
One final note: Advise your kids to be cautious when posting personal contact information (especially phone numbers, addresses and email addresses) on job sites because spammers and aggressive marketers have been known to troll these sites for leads. You may want to set up a dedicated email account to help weed out spam.
This article is intended to provide general information and should not be considered tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how tax laws apply to you and about your individual financial situation.