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Your Teen’s Summer Job and Taxes

It’s a good idea for kids to learn how to work. A summer job [3] might be just the thing. Indeed, a summer job is probably one of the best things a teenager can do to learn about hard work, and to learn about money management. Even if you feel that a high school job [4] isn’t necessary during the school year, once summer rolls around, there are few things as rewarding as a summer job for a teenager.

Not only can a summer job help your child earn money, but it can also reduce the number of times you hear “I’m bored” echoing throughout your home. However, even as your teen learns valuable life skills and makes more money, it’s important that your remember that Uncle Sam is likely to want his cut. There’s a chance that your teenager will also end up paying taxes on his or her summer job. (And, if your child has investment income, don’t forget about the kiddie tax [5].)

Generally, if your teen is your dependent, he or she doesn’t even have to file a tax return unless he or she makes more than the standard deduction. For 2012, the standard deduction for singles is $5,950. As long as your teenager doesn’t make more than that, you don’t have to worry about his or her taxes. When filling out the W-4 for an employer, your teen might be able to claim an exemption on Line 7 is he or she is pretty certain that wages for the year won’t exceed the standard deduction.

While that is pretty straightforward, things get a little stickier if the employer uses different employee designations.

1099 Worker vs. W-2 Worker

More and more employers are starting to classify workers — especially temporary workers — as contractors. This means that instead of filling out a W-4, the employee fills out a W-9. When wages are reported, they are reported on the 1099 instead of on the W-2. The classification as a contractor is a big deal. When you are classified as a contractor, you are considered to be self-employed, and the company hiring you doesn’t have to worry about paying taxes on your behalf. This means that you are responsible for self-employed tax.

For teen workers, this could be a real shock. Instead of having payroll taxes withheld by the company, a ¬†teen worker will have to pay those on his or her own when net earnings are more than $400. The requirement to pay taxes as a self-employed person doesn’t vary with age. It’s firm. So, even if your teenager doesn’t make enough to have to file an income tax return, he or she might still be on the hook for self-employment taxes if the company he or she works for treats summer employees as contractors.

It’s important that you pay attention to the classification that your teen’s employer is using. Have your teen pay attention to the paperwork, since you don’t want to be caught unawares. Find out for sure how the company designates employees, and try to ensure that your child is a W-2 worker, as opposed to a contractor who will receive a 1099 form come tax time.

(Photo: friedmanlynn [6])