Summer is the time of the year children and young adults may consider entering the work force in some capacity. The chances are good that you have clients with kids who have summer jobs, either working for an employer or are self-employed. To avoid withholding, estimated taxes and other surprises, spend some time educating your clients by passing along the following tips.
- All income you receive from any source is reportable on your tax return, including income from side jobs, self-employment, barter exchanges and any sort of fellowship for which you perform services. However, you can earn a certain amount of income without having to pay taxes or file a return; here are the filing requirements. Even if you can be claimed as a dependent on someone else’s tax return, you still need to file a return if your income exceeds the standard deduction ($6,350 for single taxpayers in 2017) or if your self-employment income is $400 or more. You should file a return even if you’re not required to because you may be entitled to get your withholdings back.
- Anyone working should complete Form W-4, Employee’s Withholding Allowance Certificate. Employers use this form to determine the amount of tax to withhold from a paycheck. If a student has more than one job, he or she should make sure all employers are withholding enough taxes to cover the total income tax liability. To ensure withholding is correct, use the IRS Withholding Calculator.
- In some jobs, such as waiting tables, the student may receive tips from customers. Tips are considered income, just like hourly wages. Therefore, the student must pay tax on them. This includes tips customers given to the student directly, tips customers charge on credit cards and the share of the tips split with co-workers. For more information about reporting tips, read Publication 531, Reporting Tip Income.
- Many students work odd jobs over the summer to make extra cash. Earnings received from self-employment, including jobs such as babysitting and lawn mowing, are subject to income tax. Income received as an independent contractor is reported on Schedule C or Schedule C-EZ (Form 1040). You may also receive tax deductions from business expenses in connection with that income, such as supplies, auto mileage and cost of goods sold. If net income is $400 or more from self-employment, the student may have to pay self-employment tax. This tax pays for Social Security and Medicare benefits, normally paid for by withholding from wages. The self-employment tax is figured on Form 1040, Schedule SE. If you are self-employed, you may have to pay estimated taxes directly to the IRS on set dates during the year.
- If you’re not paid for work performed in cash, you may, instead, receive services or goods. This is called barter income and you must report the fair market value of the goods and services you received. For example, let’s say you provide babysitting services for your neighbor and he gives you a credit at the restaurant he operates or a bicycle from the bicycle shop he owns; that would be income to you.
- If students are in the ROTC and participated in advanced training, the subsistence allowance received is not taxable. However, active duty pay, such as pay received during summer advanced camp, is taxable.
Editor’s note: This article was originally published on July 6, 2016, and updated on July 14, 2017.