When your child or younger sibling gets her first job, it's a rite of passage, but one that may come with some tax implications. The Internal Revenue Service applies a few different rules for teenagers, and you might find yourself having to learn the ropes if you're going to help her prepare her return.
What qualifies as income for a teenager is not much different than that for any other taxpayer. Unearned income, such as interest or dividends, is typically the result of investments. Earned income includes wages, salary, tips, or anything else received in exchange for work or services – even if your teenager only works part-time. If she's attending school and she receives any scholarships or grants, the IRS also considers this earned income. You'll have to count these amounts when figuring out whether your teenager must file a tax return.
The total of all sources of your teenager's income determines whether she's required to file a tax return. She can earn up to the amount of the standard deduction for single filers, $5,950 as of the 2012 tax year. This means she can earn about $114 a week if she works all year and doesn't have any scholarship income, grant income or unearned income. However, if her employer is withholding taxes from her paycheck, she can't claim a refund for any overpayment unless she does file a return.
If your teenager has unearned income in addition to earned income, she must file a return if her earned income exceeds $5,650 plus $300, or $5,950. This is actually more generous than if she had only unearned income. If she doesn't work, she must file and pay taxes if her unearned income exceeds $950 for the tax year.
In a tough economy when jobs are scarce, your teenager might decide to branch out on her own, selling her own skills or talents to earn money. If she does, she runs the risk of having the IRS determine that she's self-employed – which means that she must pay self-employment tax at the rate of 2.9 percent of her earnings for Medicare and 10.4 percent for Social Security. The income limit for self-employed taxpayers is $400; if your teenager earns more than that at her own enterprise, she'll have to file Schedule C with her return and pay these taxes after taking allowable deductions for work-related expenses. Fortunately, if she mows lawns, babysits or delivers newspapers, she's exempt from this rule – the IRS says these jobs are not technically self-employment.
Exemptions From Withholding
If your teenager works for you and is younger than 18, you don't have to withhold FICA taxes from her paychecks – her contribution to Social Security and Medicare. She also doesn't have to pay federal unemployment tax until she's 21 if she works for you. This only applies if your business is a partnership or a sole proprietorship, however. If her job is summer only and you're sure she won't approach the $5,950 filing requirement, she can claim an exemption from federal income tax withholding on Line 7 of her W-4 when she completes it for her employer. If her employer withholds nothing from her paychecks, she won't have to file a return to ask for a refund.
Beverly Bird has been writing professionally since 1983. She is the author of several novels including the bestselling "Comes the Rain" and "With Every Breath." Bird also has extensive experience as a paralegal, primarily in the areas of divorce and family law, bankruptcy and estate law. She covers many legal topics in her articles.