Taking on a summer job is a rite of passage. Most of us at one point or another in our teens worked fast food, babysat, mowed lawns or delivered newspapers to earn pocket money.
You might find your son or daughter creating their own business or taking on more traditional summer jobs. Either way, having a working teen in the family can affect your taxes.
Working in the family business
Gone are the days of kids working as free labor on the family farm. If you own a sole proprietorship or partnership, having your teen spend the summer working for you gives him or her a taste of business ownership, and gives you some tax breaks.
If your teen is younger than 18, you won’t have to withhold FICA taxes from their pay. You are also exempt from paying federal unemployment tax until your teen turns 21.
Claiming a working teen as a dependent
You can still claim your employed teen as dependent if they meet the following criteria:
- They must live with you for more than half the year and
- They don’t provide more than half of their own financial support year-round
If your teen files their own tax return while you are still claiming them as a dependent, they can’t claim their own personal tax exemption on their tax returns.
Self-employment
If your teen passes up traditional summer jobs in favor of self-employment, running their own business can bring them the flexibility and satisfaction typically not found with most summer jobs.
This rule also applies if they earn more than $600.00 working for someone else as an independent contractor, regardless of whether or not the employer issues a 1099 form at the end of the year.
Although a self-employed teen may not earn enough to be subject to federal income taxes, they may still be liable for self-employment taxes at the rate of 15.3% of their net profit.
Taking on a summer job is a good way for teens to save toward a car or for college. Teens aren’t just limited to babysitting or cutting lawns any longer. With the expansion of technology comes a host of job opportunities for teens, in addition to a more flexible work model.
Regardless of which path your teens takes to summer employment, being aware of the possible tax implications for both you and your child will eliminate some stressful tax-related surprises at the end of the year.
As with any tax matter, enlist a qualified tax professional who can answer questions regarding your specific tax scenario, and who can help your teen with their tax-related questions.