As employers seek to fill positions, it’s a great summer for teenagers to get a summer job and learn about taxes too

What: As the economy reopens after the COVID shutdowns, many employers are looking for summer/seasonal workers, especially at entry-level positions. Teenagers should find a lot of job opportunities in areas such as restaurants, hospitality, and summer camps. Earning money, however, also means paying taxes, and learning how to pay taxes is an education itself.

Why: Taxes are complicated. There are many types of taxes. Tax issues vary depending upon whether you work as an employee or are self-employed, or whether you are still a dependent on your parents’ tax return. While there are exceptions to almost every rule, teenagers are accustomed to learning new and difficult subjects. This infographic provides teens and their parents with some summertime job facts and things to consider from an income tax perspective.

Welcome to taxes for teens 101

• Working as an employee for a business will generally require completing a Form W-4 that tells the employer how much to withhold from your wages for income, Social Security and Medicare taxes. Your earnings will be reported to the Internal Revenue Service (IRS) on Form W-2
• Many states also have an income tax that requires additional withholding
• You could be an employee for more than one business. For example, if you hire yourself out to a number of businesses for your products or services, you may be an independent contractor and may have to complete a Form W-9 for some businesses and pay estimated taxes four times a year rather than withholding. Some of your earnings may be reported to the IRS on Forms 1099, but your earnings are generally taxable whether reported to the IRS or not
• Self-employed persons pay both the employer’s share and the employee’s share of Social Security and Medicare tax withholding, but you have the advantage of being able to deduct business-related expenses
• With the current high standard deduction of $12,550 for 2021, many teenagers may not owe income taxes unless they earn over that amount or have other investment income
• Unearned income, such as from investments, will require paying income taxes at lower income levels and may involve the Kiddie Tax, where part of the unearned income is taxed at the parents’ tax rate
• Even teenagers who do not owe income taxes may be subject to Social Security and Medicare taxes unless they are under 18 and in certain exempt jobs, such as a family business, mowing lawns, babysitting, or making deliveries
• If you did not owe taxes last year and do not expect to owe taxes this year, you may be exempt from income tax withholding; you can indicate this on the Form W-4
• Income earned from tips is also taxable and must be reported to your employer if the total is over $20 in a month
• You and your parents should monitor summer earnings to determine whether you still qualify to be a dependent on the parents’ tax return
• Even if you are not required to file a tax return for the year, there may be reasons to do so, for example, if you want to get a tax refund or qualify for the American Opportunity Tax Credit for education expenses
• You may even qualify for the refundable Earned Income Tax Credit in 2021 if age 19 or older
• A summer job can provide the earned income necessary to contribute to a Roth IRA, which the parents can fund rather than using the teenager’s earnings

Who: Tax expert Mark Luscombe, JD, LL.M, CPA, Principal Federal Tax Analyst at Wolters Kluwer Tax & Accounting, can help discuss the tax issues facing teenagers and their parents with that first summertime job.

PLEASE NOTE: These materials are designed to provide accurate and authoritative information in regard to the subject matter covered. The information is provided with the understanding that Wolters Kluwer Tax & Accounting is not engaged in rendering legal, accounting, or other professional service.

Contact: To arrange interviews with Mark Luscombe and other federal and state tax experts from Wolters Kluwer Tax & Accounting on this or any other tax-related topics, please contact Bart Lipinski.