5 Essential Tax Tips for Teenagers

February 26, 2013 : Miranda Marquit - Guest Contributor

Ed Note: It’s never too early to learn about filing taxes! If your teen earned a 2012 paycheck from a summer job or an after-school gig, be sure to go over these tips from Miranda Marquit of Wise Bread to kick off the family discussion about teen taxes.

The summer job is a rite of passage for many teenagers. And many teenagers find out the hard way that paying taxes is a regular part of life.

As you gather documents to file your own taxes, don’t forget to consider whether or not your teenager owes money to the IRS as well.

Does Your Teen Owe Taxes?

Generally, if a teen is a dependent of another taxpayer, he or she doesn’t have to file a tax return unless  their unearned income (such as interest and dividends) is over $950, their earned income is over $5,950, or their gross income is more than the larger of  $950, or earned income (up to $5,650) plus $300.

Check your teen’s earnings for the year to see if they are below the standard deduction amount. If they are, your teen won’t even need to file an income tax return in most cases.

Choose the Right Employee Designation

Pay attention to the way your teenager is classified by the employer. Some employers like the idea of hiring summer help as contractors, rather than as “regular” W-2 employees. Contract workers come with fewer paperwork and tax complications for the employer.

Teenagers might also find this arrangement attractive because they don’t see withholdings from their paychecks. When a teen is a W-2 employee, payroll taxes, and even federal taxes, can be withheld from the paycheck. The fact that federal taxes often come back as a refund rarely registers with teenagers. Being a contractor seems like the way to go because the paychecks are often bigger.

Unfortunately, being a 1099 contractor can come with extra headaches at tax time. A teenager who makes more than $400 as an independent contractor has to pay self-employment taxes. So, even if your teen doesn’t make enough to owe federal income taxes, he or she will have to file a return and pay self-employment tax.

Consider the implications of different types of employee classification, and realize what seems like a good idea for a summer job might not be as attractive come tax time.

Special Tax Rules for Teenagers

There are some special cases for teenagers doing certain jobs.

Household employees under the age of 18 don’t have to worry about payroll or self-employment taxes, unless they are in the trade or business of that job. This means that there are exceptions for jobs that include mowing lawns and babysitting. Those under 18 can also get a self-employment tax exemption if they deliver newspapers.

It’s also worth noting that you can hire your teen for work in your sole proprietor family business, and you don’t have to worry about payroll taxes. But, once again, you need to be careful. Even in the family business, once you pay your teenager enough to hit the standard deduction for filing, everything changes and withholdings become important.

The Kiddie Tax

Many parents like to teach their children the importance of investing. However, unearned income for teenagers is subject to different rules than earned income — just like it is for adults. If your teen’s investment income reaches a certain level ($950 for tax year 2012), he or she has to file a tax return and report.

Money above that level is generally taxed at 10%. However, there is another threshold ($1,900 for 2012) that is in effect as well. Once this second threshold is reached, your child’s unearned investment income is taxed at your marginal rate.

If your child has earned income, he or she is eligible for an IRA. It might make sense to hold some of the investments in a Roth IRA, so that income grows tax-free.

Don’t Forget State Taxes

Finally, even if you are covered with regard to federal taxes, it’s important to remember that each state has its own income tax rules and requirements. Don’t forget to look into your individual state tax law, and make sure that your teen is in full compliance.

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Miranda Marquit - Guest Contributor

Miranda is a professional personal finance journalist and founded Planting Money Seeds. Her work has been mentioned in USA Today, The Huffington Post, The San Francisco Chronicle, The New York Times, The Wall Street Journal, and other publications.