Do you remember your first job? Do you remember the thrill of finally earning your own income?
I do. I was 15 and received my lifeguard certification. I thought that I was one of the coolest kids around. Not only was I earning a little extra cash but I was spending my days bathing in the sun.
Chances are, your teenager wants the opportunity to make some extra cash. Whether she is working a traditional job with a paycheck or mowing neighborhood lawns for cash, your teenager will have to pay taxes on their income.
Unfortunately, understanding taxes on a teenager’s income can be a little tricky–but it’s important to help your child successfully navigate their first experience with the IRS.
Chances are if your teen earns over $12,950 in 2022 they will need to pay taxes on their income. But even if they earn less than that they will likely still want to file a return at tax time since they likely had taxes withheld from their paycheck and may qualify for a return of overpaid taxes.
Below is what you need to know about your teen’s tax burden before it’s time to file.
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Dependency and Minimum Income Threshold
Provided your teenager still lives at home for more than half the year and is dependent upon your income for more than half of his or her financial support, then you can and should still claim your child as a dependent. (For the specific requirements of what constitutes a qualifying child or qualifying relative as a dependent, check out the details on pages 11 and 12 on the IRS website Publication 501.)
You know the tax benefits of claiming your child as a dependent. These benefits include being able to claim an additional personal exemption per dependent, as well as the child tax credit, the child, and dependent care tax credit, and the earned-income tax credit. These are not tax benefits that you will want to give up just because your teen is filing taxes for the first time.
Since you are claiming your teen as a dependent, he cannot legally claim himself as a dependent. Therefore, teens will find they have to pay taxes on anything they earn over the standard deduction for single taxpayers, which for the 2021 tax year is $12,550 ($12,950 in 2022.) Should your teen earn less than that amount, he owes no federal income taxes.
There is one caveat if your teen has unearned income (i.e. interest income.) In this case, the minimum income threshold is any unearned income over $1,100, or any combined earned and unearned income that is MORE than their earned income plus $350. This post has a clear explanation–it’s not something you or they need to worry about if they don’t have unearned income.
Withholding and Claiming Cash Earnings
If your teen is working a traditional job with a paycheck, filing taxes is relatively simple. Their employer is responsible for withholding taxes from their paycheck based upon how they filled out her W-4 at the start of the job.
If, however, your teen is earning money by babysitting or mowing lawns or works a job that relies on tips, things get a little more complicated. The IRS does not care whether you are on a payroll or are getting paid in cash–either way, you must report your income and pay any applicable taxes.
If a teen earns more than the threshold amount by babysitting or doing other service jobs that are paid in cash, the teen will owe federal, and maybe state, income tax, so it is important for your teen to keep a careful record of his earnings.
If the cash your teen is earning comes from tips and totals $20 or more per calendar month, it is up to the young employee to fill out forms 4070A (Employee’s Daily Record of Tips) and 4070 (Employee’s Report of Tips to Employer) in order to make sure that the correct amount is withheld from his wages.
How to Fill Out a W4 Form For a Teenager
When your teen starts a summer or part-time job, they will be required to fill out a W4 form. This lets the government know how much, if any, income to deduct for federal and state income taxes.
For the majority of teens this will be quite simple. They will just fill out the personal information section and then sign and date the form at the bottom.
Here’s a more detailed walkthrough:
First, fill out the top part where it requests your personal information.
Step 2 only applies if the teenager has other income. This could be income from another job or income from investments. Most teenagers probably only have one source of income so you will most likely be able to move down to Step 3. The purpose of this section to avoid too much or too little taxes being withheld.
You can use the calculator listed in part A to calculate an approximate amount of taxes due from all sources of income. Here’s that calculator. Estimate high, it’s better to get a return than to owe taxes in April.
Step 3 applies only if the teenager has dependents.
Step 4 is where you can ask for extra money to be withheld (or not withheld if you know of extra deductions.) You may want this if you determined it was needed back in Step 2. If the teenager has no other sources of income–or if that other income is being taxes appropriately, then this section can be skipped.
All your teen has to do for step 5 is sign and date!
If your teen is self-employed–for example by giving music lessons or working as a freelance writer or web designer–then she will have to pay self-employment tax on any income she makes over $400 in the course of the year. This is a 15.3% tax on income that is equivalent to a payroll employee’s Social Security and Medicare withholding, usually written as FICA on paychecks.
The low threshold for self-employment tax remains firm throughout the years, even though the threshold for federal income tax is adjusted each year for inflation. This means your enterprising teen may not make enough to pay income tax, but she may still owe Uncle Sam self-employment tax.
However, there are some exceptions for that self-employment tax. Teens 18 years old or younger who are providing a service like babysitting or lawn mowing to another individual are considered household employees. That means that the work done by these household employees is not subject to Social Security and Medicare taxes. This exemption is also the case for newspaper carriers—which shows that the IRS does try to give a break to the typical teen worker.
Taxes on Young Entrepreneurs
Some teens choose to get a jump on the American Dream by starting their own business. In this case, the paperwork could potentially get pretty complicated. Small business owners will owe income tax on anything they earn above the income threshold, as well as self-employment tax, which is 15.3%, regardless of how much they make.
However, in order to determine taxable income, a young business owner will need to track income and expenses. Your teen will need to get Form Schedule C (Profit and Loss from Business) when filing the Form 1040.
If your teen is driving their own car as part of their job, they may be able to claim the mileage.
The first, and most important step, is to keep accurate records of your mileage. This includes knowing your mileage at the beginning and end of the year, as well as recording:
- the date of your trip
- the address you’re starting from
- the address you’re ending at
- the purpose of your trip
- the starting mileage on your vehicle
- the ending mileage on your vehicle
- tolls, or other trip-related costs
The IRS standard mileage rate for the 2020 tax year is $0.575 per mile for business-related driving, $0.17 per mile for medical or moving purposes, and $0.14 per mile when driving for a charitable organization.
The driving done for work is deductible as long as it’s not reimbursed by their company, however the driving to and from work (the commute) is not. If they are self-employed, the drive from their home to another location for business purposes (for example, lunch with a client or taking items to the post office) would be considered deductible.
One of the best ways to keep track of their miles is through an app like Quickbooks Online. It saves all their mileage in one place, making sure they don’t miss any important details. They can then send a mileage report to their CPA at the end of the year, or file directly from the app.
They can also claim vehicle expenses based on actual expenses. To do this, they must record all costs related to the vehicle, including maintenance and repairs. Then they need to figure out what percentage of their total mileage is business eligible vehicle expenses and deduct that amount from their taxes. For teens, this method is a little bit trickier.
Teens and Unearned Income
If your child receives income from investments–that is, unearned income–in addition to earned income, the amounts must be added together in order to determine the filing requirements. Teens under age 18 will have to pay taxes on unearned income if exceeds a certain amount. In 2020, that unearned income trigger amount is $1,100.
Parents will probably want to file their child’s unearned income separately. Adding your teen’s unearned income to your return requires a separate form–8814 Parents’ Election to Report Child’s Interest and Dividends–and it can result in a higher income tax for the parent.
In addition, it’s important to note that it is illegal for a parent to claim capital gains from the sale of a child’s stock. In general, it makes more sense for a child’s unearned income to be filed on a separate return.
The Bottom Line
Even if your teen is not making enough money to pay federal income taxes, it’s a good idea to have him or her file a return. Remember that filing a return is the only way for a teen who has had taxes withheld to get a refund—and learning how to navigate the tax system with a parent’s help will be a good introduction for your teen to the world of taxes.