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Summer jobs for kids could mean taxes for kids

Every summer our neighborhood newsletter looks like a mini Craig's List. All the kids are looking to make some money.

Young lawn mower by woodleywonderworks via Flickr CC
A day every father dreams of courtesy woodleywonderworks via Flickr CC

We have teens and preteens wanting to walk dogs, water plants, do more extensive yard work, tutor (class work and sports skills), scoop pets' poop (this kid will get a real job quickly!), fix computer glitches (so will this youngster) and house, dog and/or baby sit.

Hooray for such industrious youth.

The Internal Revenue Service is cheering my young neighbors, too.

If kids are lucky enough to land a summer job, and apparently that's not so easy this year, then they could end up sharing some of their seasonal earnings with Uncle Sam.

Today's Weekly Tax Tip offers a closer look at teen jobs and taxes. Until you have time to check it out, here are some highlights for young workers and their parents.

Working through withholding: If a child goes to work for someone else, he or she will have to fill out a W-4. As most adults already know, this form is what employers use to determine how much tax to withhold from an employee. Mom and dad, along with the IRS' payroll withholding calculator, can help you fill out this form.

A young worker might think he or she can claim an exemption from withholding because mom and dad claim him or her as a dependent. Sorry. The W-4's instructions note that even if another person can claim you as a dependent, you still cannot claim exemption from withholding if your income exceeds $1,000. Here's hoping you're making at least that much for the summer!

However, do check out line 7 on Form W-4. This is another place where a withholding exemption is possible.

Generally, though, the young worker needs to fill out a W-4 and have taxes withheld. You'll likely get all or most of the tax money back when you file a return, which you'll have to do next filing season if you earn more than the tax year's standard deduction for single taxpayers. For 2014 that's $6,200.

Contractors, cash considerations: Instead of a W-4, some employers might ask you to fill out a Form W-9. This means you would be considered an independent contractor rather than an employee.

It also means you are responsible for all taxes, income and self-employment, which is discussed in the entrepreneur section below.

There are legitimate reasons for some companies to hire contractors. There also are some shady ones, such as the boss who misclassifies workers as contractors in order to avoid the employer portion of Social Security and Medicare taxes. So be careful if you're offered a W-9 contracting job.

Also note that if you're paid in cash, that doesn't mean the money is tax-free. All income, regardless of the form of payment, is taxable. And the cash payments also could subject you to self-employment taxes.

Young entrepreneurs and taxes: There's no age limit on being your own boss. Youths who work for themselves are getting good training on setting up bigger businesses later in life. One thing they must learn is that self-employment means more tax issues.

Earnings from yard services, tutoring, babysitting and the like are taxable. You can lower your potential taxable income by subtracting legitimate business expenses. So keep track of all the costs of running your own summer business.

On top of possible income tax due, you'll owe self-employment taxes if you make more than $400. That's right. You could end up not making enough money -- that $6,200 mentioned above -- to owe income tax, but still have to file a Schedule SE to pay self-employment tax on the $401-plus you made on your own.

These SE taxes go toward your future Social Security and Medicare benefits. I know that seems way too far away for a young worker to be worrying about. But trust me, one day (and much sooner than you want!) you'll be glad you didn't cheat yourself out of possible future retirement earnings.

Tips are taxable: Many young workers spend their summers as servers at restaurants or other jobs where tipping is common. That's not free money. Tips are taxable income.

Keep a record of your gratuity amounts and you must tell your employer when you receive cash tips totaling $20 or more in any month. Even if you have a slow tip month, that lesser amount still must be reported on your tax return.

File anyway: Even if you didn't earn enough to require that your file a Form 1040, it might be worthwhile to do so anyway. You might just qualify for a refund of some or all of the taxes that were withheld by your employer and the only way to get that refund is to file.

Open a Roth: Finally, let me go back to the young worker's future retirement. Once you start earning money, you can open an individual retirement arrangement or account as it's commonly known.

For young folks, a Roth IRA is usually a better move than a traditional IRA. Your Roth contributions are not deductible, but most kids don't make enough to worry about tax deductions.

But because your Roth IRA contributions were made with after tax money, when you take it out many years down the road to fund your retirement activities, the distributions will be tax-free.

And you don't even have to use any of the money you make this summer to open a Roth. You have until April 15 next year to set up and contribute to an IRA, so you can wait until you file and get your refund and then put that money into the retirement account.

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