Teens, summer jobs and taxes

Summer's here. That means that many teenagers will be looking for a seasonal job.

And those jobs mean that the young workers also will have some tax considerations.

For the most part, the IRS is an equal opportunity income tax collector. If you make money, the feds want a cut.

But when it comes to young workers, there are some special rules.

Things like being a dependent, the amount a kid earns, how the young worker makes the money (as wages or via self-employment) all come into play and I examine them in my story Teen jobs and tax issues.

Do you have a potential young worker? Are you helping your teenager find a summer job or start his or her own enterprise this summer?

How are things going?

Tough times for job-seeking teens: The New York Times reported this week that in the current economy, the job outlook for teenagers has worsened.

Back in my day (I didn't mean for that to make me sound so old, but ... c'est la time marching on), I enjoyed my annual three-month journey into the real world. Of course, I lived in a small town where folks helped each other, and their kids, out when it came to seasonal employment.

In addition to making me feel temporarily grown up, my summer jobs helped me stash some cash to help pay for some college costs. There also was the financial opportunity to pick up an occasional new LP album. (Yes, vinyl; I guess "back in my day" is the appropriate phrase!)

I must admit, however, that back then I didn't think about potential taxes. My ignorance all those years ago might have been tax bliss, but an older and wiser me suggests you check out the possible tax ramifications a teen worker faces.

The good news. Most youngsters likely won't owe any income taxes. Even better, a young worker can prevent unnecessary withholding from a summer paycheck (again, details in my story).

And if an employer does take payroll taxes out of your (or your son's or daughter's) paycheck, those tax withholdings in most cases can be collected by filing a 2010 return next year.

Related posts:

• 3 requirements to deduct job search costs
• Jobs, no jobs and taxes
• Unemployment's terrible tax surprise
• Tax concerns of the unemployed
• Writing off job-related moving costs

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Comments

[Kay]

Thanks, Joe, for letting us know the Roth resolution and kudos to you for making good money management habits real to your daughter! I still remember my first savings account and the little fake leather passbook where the teller entered all my deposits and tallied interest. Times and savings vehicles have changed (although interest rates today are about what they were when I was a kid) but the lessons remain. Kay

[joetaxpayer]

To wrap this up -
I went back into my daughter's tax return in Turbo Tax. It offers a worksheet "Wages, salaries, & tips" which has a line for "other earned income." This flows nicely to the 1040 only on the 1040 it loads to line 7, which asks to attach the W2 (as part of the form itself).
Schwab has a nice IRA form for minors, no issue there, it doesn't ask any more than the usual account info needed. No proof of income, etc.
In the end, I agree with the ROI thought. They'd get no return at all, as there's no deduction for the Roth. Their only result would be to disallow the account. I will tell Jane2.0 I'd like her to keep a notebook she can get signed by her customers to verify the income.
I've already told her that by starting this at 11, she will have more in her account by college graduation than the average American has saved up.

[Kay]

Joe,
That was my understanding of your original question. Again, I believe it comes down to some sort of acceptable documentation. I would start with the company/bank/etc. where your daughter (you!) would like to open the Roth and ask what they require in her situation. I doubt you'll have much to worry about from an IRS audit standpoint; young Roth account holders probably don't offer much audit ROI! The key here as I see it is what the IRA company/fiduciary wants from you/your child to confirm eligibility.
Kay

[joetaxpayer]

I'm still following this. My understanding is that if we had a nanny there was a trigger amount $1700/yr or so, that required full reporting. Since her wage was a full salary, I had to comply, and did. SS, Insurance, etc.

When the neighbor shovels my walk for $20, it doesn't occur to me to 1099 him. In my 11yr old's case, she sits for a number of people none of whom will exceed more than a few hundred dollars over the year. But all combined will be enough that a Roth may make sense.

I thought that when earning less than her own standard deduction, no tax return was even due (so long as unearned income was low enough). My reason to want to report the income is only to justify the Roth.

[Jeff Day EA]

To me, neither Kay nor Garran answered the question that wasn't asked by Joe. That should have been answered. But Joe is obviously misled. He stated: "a household employee who is younger..."

The teen is not subject to the social security tax if he is under only if he parents are paying him the monies. If anyone else pays a 15 yr old monies the teen is subject to social security taxes albeit self-employment or withholding.

Even if the teen is being paid by a grandparent the social security taxes are due.

[Garran]

If the household "employee" is in fact an employee he or she would receive a Form W-2 at year end, in which case this income would be reported on the front page of the employee's Form 1040. The Form W-2 would substantiate the their income.

IF the household worker is deemed to be an independent contractor he or she would typically report the gross revenue earned on Form 1040, Schedule C. In this case the contractor's books, invoices, and sales/excise tax returns would be used to substantiate their income.

[Kay]

Joe,
Great question! As best I can tell, the IRS and Roth fiduciaries will accept the contributions as from earned income if proper receipts and records are maintained.

So the young sitters, etc., should create a standard receipt form for the hiring/paying families to sign.

Welcome to the world of tax record-keeping young entrepreneurs!

Any other tax folks out there have recommendations?
Kay

[joetaxpayer]

"a household employee who is younger than 18 at any time during the tax year the work was performed is not subject to Social Security and Medicare taxes"
This means that as long as they are under the $5700 earned income, no tax due.
Where would this income be claimed to enable the minor to show it for purposes of opening a Roth? And since families don't 1099 their sitters, what proof would the IRS expect, if any, in an audit?
Thanks, Kay.

Joe