School is out for the summer, or will be shortly, and for many high school and college students, that means the start of a summer job. The U.S. Bureau of Labor Statistics reported that 19.5 million youths between the ages of 16 and 24 were employed last July, and we can expect close to the same number on payroll this year. While summer jobs and earnings have expected tax implications for the summer worker, much to the surprise of the parent, there can be an impact on their tax return too.
Besides having some extra cash in their pocket, summer jobs are a great opportunity for young Americans to learn about income taxes and tax return responsibilities. As a parent and a tax professional, I know firsthand the importance of preparing children for financial responsibilities, and now is a great time to start that conversation -- especially for a first job or reoccurring summer employment.
Additionally, dependent student income from a summer job, or any job, can have implications on the parent's tax return in ways that range from one more return for the family tax preparer to lost benefits such as the possible loss of an exemption and other tax deductions and credits. Having a new working member in the family is always a great thing, but there are potential implications taxpayers need to know about to avoid any surprises next tax season.
Here are 10 things every taxpayer needs to know about a first-time job or any change to the earning structure in a family:
- When to start filing a tax return: If an individual, in this case your child, has as little as $400 in self-employment income, they may be required to file an income tax return. If the individual works for someone else, they are required to file once they have more than $5,950 in income.
- What tax return to file: Taxpayers with wages, especially if taxes have been withheld, will need to file a tax return. This is true even if income is less than the filing threshold, but filing a return is actually a good thing as it's the only way for the student taxpayer to get withheld income taxes back from the IRS.
- Whose tax return to claim the income: Students who have earnings from a job, sell stock, have self-employment income, or receive pension income as a beneficiary, must file their own tax return and can't include their income and tax withholdings on a parent's tax return. But do not be fooled, having a dependent student income file a tax return does raise complexity for the parents and the student. To make sure you're making the most of both your tax situation and your newly employed child's, you may want to speak with a tax professional.
- Tax rules for claiming working dependents: Tax rules for a dependent child are different than any other type of dependent. A dependent child can have any amount of income and still be claimed as a dependent as long as the child does not provide more than half their own support. This includes gifts, entertainment, food, shelter, clothing, purchasing a vehicle, maintaining a vehicle, other forms of transportation and school expenses. Individuals who can be claimed as a dependent on another taxpayer's return (usually their parent's or legal guardian's) cannot claim their own exemption. This is true even if the other taxpayer chooses not to claim the individual as a dependent.
- Filling out a Form W-4: All employees on payroll will have taxes directly deducted from their paychecks. Employees are required to fill out a Form W-4 before beginning their employment to let their employer know how much to withhold for federal and state income taxes. A good rule of thumb for student's working part-time throughout the year, or just over the summer, is to claim zero exemptions to ensure they have enough taxes withheld so they don't owe money to the IRS come tax time. If income is low enough, the taxpayer student should get all of the taxes back and if not, having enough withholding should prevent a balance due when filing.
- Claiming the Child Tax Credit: Working dependents under the age of 17 are still eligible dependents for the Child Tax Credit. If a parent can claim a working 16-year-old as a dependent, the parent can claim the Child Tax Credit, which can be worth up to $1,000 per eligible dependent.
- More complex tax return: If your child has a large amount of investment income or self-employment income instead of, or in addition to, a job, their tax return can become very complex. It is a good idea to talk to a tax professional if your child has other types of income in addition to their job such as investment income or self-employment income.
- There are consequences for filing a tax return late: Your child not filing a tax return when it is required can create pain for you. The IRS will send notices to your address and they can start garnishing your child's wages for unpaid back taxes. While this doesn't affect you directly, it can make your life more painful while the issue is cleared up. Start a lifetime good habit now by encouraging your working dependent to file their income tax return on time.
- State tax returns: Most states have an income tax, and the rules for that tax vary from state to state. Many working students don't realize they must file two tax returns -- federal and state. Make sure your student files their state tax return when they file their federal tax return.
- Don't file on a smartphone: No matter how convenient and tempting it may be, don't prepare and file that very first tax return on a smartphone. Identity theft, lost records, need for a future copy and even errors or omitted tax benefits are just a few of the issues that can occur if you short cut the tax return preparation and filing process. Be encouraged to use technology and to electronically file a tax return, but be mindful before using a smartphone application if so inclined because "the tax return is just so easy." There are plenty of low cost and even free tax preparation services. In addition to tax software applications available from different companies, there's even IRS Free File option, but be careful about filing a tax return on a smart phone. Take that first step for filing a tax return carefully.
It can be difficult to think about how your child's summer job can affect your tax return the following year, but understanding the tax implications now can help young taxpayers make smart decisions to lower their tax expenses and possibly increase next year's income tax refund for the both of you.
Those who tend to get the largest tax refunds are those who plan their tax strategy throughout the year, not just at tax time. Finally, as was said, remind your child to start a lifetime good habit and file their tax returns on time and make sure they are protective of their identity. Taxes are complex and they can be even more so when you have a working dependent, so get some help early on understanding which possible implications may affect you.