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.
Here is what you need to know about your teen’s tax burden before it’s time to file:
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 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 herself as a dependent. This also means that he will have a lower minimum income threshold for filing taxes. Rather than the single filer amount of $10,350 in 2017, teens will find they have to pay taxes on anything they earn over the standard deduction for single taxpayers, which for 2017 is $6,300. Should your teen earn less than that amount, she owes no taxes.
Withholding and Claiming Cash Earnings
If your teen is working a traditional job with a paycheck, filing taxes is relatively simple. Her employer is responsible for withholding taxes from her paycheck based upon how she filled out her W-4 at the start of his job—if she has any withholding at all. According to Bankrate.com:
“if a young person doesn’t expect to earn more than the threshold amount [of $6,300 for 2017], he or she needs to note line 7 when filling out a W-4 at the summer workplace. That’s where the teen might be able to claim exemption from federal income tax withholding.”
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 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.
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. 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.
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 2017, that unearned income trigger amount is $2,100.
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.