When young students begin their first summer job, they are being exposed to a number of new things. One of these things is learning to file taxes, and getting used to the idea that they will not see all of their hourly earnings in each paycheck. The method in which taxes are withheld, paid and managed depends on the type of job the student holds, the amount they are earning, the state they live in and several other factors. To take some of the stress off of students working their first summer job, here are some important tax tips:
1) Get familiar with W-4 forms
When you begin a new job, employees must complete a W-4, or Employee Withholding Allowance Certificate. This form ultimately determines how much tax will be withheld from the employee’s paycheck. If you earn $400 or more in a given year, you will need to file a federal return. The higher the number of exemptions you take on your W-4, the lower the amount of taxes that will be withheld. While a student is likely to be refunded at least some of the money withheld from their summer job paycheck, Social Security and Medicare tax is usually non-refundable to those that make less than $48,500.
2) Know the rules of self-employment
A student working multiple summer jobs (such as babysitting, housekeeping, etc.), or hired for a summer job that pays via 1099 is considered self-employed. This means that they will have to report their income themselves. To ensure you are reporting your taxes correctly, it is highly recommended you consult a tax professional. You will want to put aside a portion of your earnings to pay your taxes when April rolls around. You also may be required to pay estimated taxes directly to the IRS on certain dates throughout the year. And keep track of your expenses as well, as some of these may be deductible on your tax return (such as gas and what you pay for your Internet connection), which will in turn save you money.
3) What your parents should know
If your parents have a business they can hire you at for a summer job, it can have several tax benefits for both them and you. First, if you are under the age of 18 and employed by a parent, your income is not taxable by Social Security or Medicare. Also, children under the age of 21 do not have to pay Federal Unemployment Tax on their income. Finally, a parent can deduct their child’s income as a business expense on their own federal tax return, which can save them money. To reap these benefits, however, the parent must be able to prove that the child was treated as a regular employee. The best way to ensure this can be proved is by giving the child all of their wages in dollars, and having the child deposit their paychecks regularly into their own bank account.
4) Don’t forget to report those tips
If you take a summer job that pays you a lot of your income in tips, such as working as a golf caddy or waiter, you must keep a daily log of your tips and report any amount over $20 that you make during any given month. You will report these tips on your tax return at the end of the year.
Author: Jessica Cody
Jessica Cody, a native of Fairfield County, Connecticut, has a background in online marketing and public relations. Currently, she works at VHMNetwork LLC in the role of Marketing Analyst. She is a graduate of the University of Connecticut, where she studied Journalism and Political Science. She is also an avid runner with a passion for the outdoors.