is the federal holiday established for remembering and honoring the people who have died
while serving in the US armed forces.The holiday originated as “Decoration
Day” after the Civil War when it was established as a time for the nation
to decorate the graves of those soldiers who died in the war.
The office of Gardner & Billing CPAs will be closed Monday, May 29th in observance of Memorial Day.
School’s out for the summer! For some students that means a summer job flipping burgers, mowing lawns or waiting tables. Regardless of how menial you might view your summer job, it will benefit you down the road to have some work experience for your first big job interview or college application. So no matter what job you choose this summer, it can add a little extra padding to both your job history AND your pockets! With that in mind, here are some tax tips for parents and students to avoid any surprises!
1. Understand the Rules for Claiming Dependents You may be wondering, since your child has a summer job, if you will still be able to claim him or her as a dependent on your own return. The answer is, "Yes." A child under the age of 19 (or under the age of 24 and a full-time student) can make any amount of income and still be claimed as a dependent as long as you are still providing more than half their support. This includes food, shelter, clothing, entertainment, school expenses, vehicle expenses, etc. As independent as your child may feel now that they are taking on some responsibilities of their own, when you add up all of the expenses, it may be surprising to see how dependent working children still are on the support of their parents!
2. Filling Out Form W-4: Determine How Much to Withhold Before your child begins a summer job, he or she will be required to fill out a form W-4 to instruct the employer how much to withhold for federal and state income taxes. To determine how much, if any, should be withheld, it is important to note the tax filing thresholds and then estimate how much they will earn this summer based on their wages and expected hours to be worked. Regardless of amounts withheld for income taxes, Social Security and Medicare tax will be withheld at the regular 6.2 and 1.45 percent rate and is never available for refund.
3. Tips and Odd Jobs Still Count! All tip income received is taxable income and is therefore subject to federal income tax. Employees are required to report tips of $20 or more received while working with any one employer in any given month. This reporting should be made in writing to the employer by the tenth day of the month following the receipt of tips. The employer withholds FICA (Social Security and Medicare taxes) and income taxes on these reported tips, then includes the tips and wages on the employee’s W-2.
Many students do odd jobs over the summer and are paid in cash. Just because it is paid in cash does not mean that it is tax-free. Unfortunately, the income is taxable and may be subject to self-employment taxes (see next). These earnings include income from odd jobs like dog walking, babysitting, and lawn mowing.
4. If No Taxes are Withheld, Set Money Aside to Be Prepared at Tax Time Your child may have a summer job where the employer does not take your child on as an official employee, but rather, as an independent contractor for their temporary summer work. In this instance, your child’s paycheck will not include any deductions for Social Security and Medicare tax, nor will there be any withholding for federal or state income tax. If $600 or more is earned from this employer, your child should receive a 1099-MISC at the end of the year. Most likely the income will be shown as non-employee compensation in box 7. This is treated as self-employment income and is subject to self-employment taxes (Social Security & Medicare contributions). In this case, your child may be required to file a tax return. Be aware that because the employer did not withhold and pay any taxes on behalf of your child, taxes may be owed when tax returns are filed the following spring. It will be a good idea for your child to set aside money from each pay check so that he or she can pay the tax when the returns are filed.
5. Know the Tax Implications of Employing your Child Many of you may be exploring the idea of hiring your child for the summer. Giving your child a summer job may provide an opportunity for tax savings for you as the employer as well as for your child. There are tax benefits of having your child as an employee if your trade or business is a sole proprietorship or partnership in which you and/or your spouse are the sole owners or partners. Wages paid to your child who is under the age of 18 are not subject to Social Security and Medicare taxes or Federal Unemployment Tax (FUTA). Wages paid to your child who is 18 years or older, but under 21, are subject to FICA (Social Security and Medicare) but are not subject to FUTA. Your child’s wages are a deductible business expense to your company, as long as your child is treated as a regular employee, wages are paid and a W-2 is filed.
6. Understand How Taxes Work with an Out-of-State Summer Job Understand the rules of residency and reciprocity as tax rules differ from state to state. Wyoming and South Dakota do not have state income tax, so income earned in either of those states would not include a separate state tax return, but would still be reported on a Montana return. North Dakota has a reciprocity agreement with Montana for income tax purposes, so Montana residents can request exemption from North Dakota income tax filing and just report income to Montana. So, if your child is working out of state, be sure to check the paystub for state withholding!
A new class of graduating seniors is about to enter the workforce and the whole new world of life after high school. Gardner & Billing CPAs want to wish the entire Broadus Class of 2017 the very best for the future ahead! Congratulations on your achievements! We want you to go forth into the world armed with sound advice for a successful future, so here are a few key pieces of financial advice from an article by Ryan Guina and cashmoneylife.com.
Understand how personal finance works Personal finance is not difficult once you learn the basic principles. Learn how credit cards and debit cards work and the pros and cons of using credit cards. You should also know how to balance a checkbook, how to bank online, how to avoid credit card fees, and other basic principles, like filing a tax return.
Spend less than you earn After knowing how to use financial tools, spending less than you earn is the most important thing you can do for your financial situation. It doesn’t matter how smart you are, how good your job is, or how much you earn – if you spend more than you take in, you will never get ahead in life.
Make a budget A budget will help you spend less than you earn every month. There are a lot of ways to make a budget; some people prefer to track every penny, and others prefer a rough guideline. The important thing is to be able to have an accurate account of your income and account for your major fixed expenses. Find what works for you and your situation and stick with it. You will thank yourself later!
Be careful with credit Credit is a useful tool, but only if you handle it responsibly. It is important to know and understand how your credit score is determined and how to improve your credit score. Your credit score is probably more important than you realize, and can affect your ability to get loans, the interest rates you pay on loans, and your ability to get a job, rent a house or apartment, or even enter a cell phone contract.
Be careful signing up for credit cards just to get a free small dollar item or a one-time discount. Many of these cards have high interest rates and low limits, and are designed to make you spend more money than you have. It is very easy to fall into the trap of never ending credit card debt.
Once you know how your credit score can affect you, it is a good idea to begin establishing your credit history. The easiest way to do this is to establish a regular payment pattern over a long period of time. This can be for a fixed loan (like a car payment) or with a credit card. The important thing is to start small and stay within your means.
Only use student loans for college expenses Student loans are for one thing only – college expenses. This includes tuition, fees, books, tutors, and other similar fees. This does not include pizza, beer, out of town football games, spring break, parties and other frivolous expenditures. You may have your student loans for a long time, and you won’t be doing yourself any favors by adding fuel to the fire.
Start an emergency fund An emergency fund is just that – a fund that you keep in a regular savings account and use only for emergencies. No, pizza and beer night doesn’t count. I’m talking about an emergency plane ticket home, car repairs, medical bills, or anything else that would be considered an emergency by normal standards. Your emergency fund will help you avoid racking up unnecessary credit card debt and let you sleep better at night.
Try to save money Once you have your emergency fund in place and are current on all your expenses, try to add saving to your budget. It doesn’t have to be a lot, but you need to save what you can. When you graduate college, you will find yourself entering a world where you are responsible for all your choices – financial and otherwise. You will need money for a down payment on a house/apartment, furnishings, a professional wardrobe for job interviews or many other expenses. A little money in the bank makes this easier, and again, will help you avoid falling into the debt trap.
Have fun You are entering one of the most memorable periods of your life. Have fun. The good news is that you don’t need a ton of money to have fun, especially when most of your friends are probably broke too. There are countless free and inexpensive activities centered on and around college campuses. Find them. Hang out with friends, have cook outs, watch movies, catch the university sporting events, volunteer, etc. The list of things to do on a college campus is as varied as the people who attend school.
Never stop learning – in school and outside school Your college days are when you will learn more about yourself, others, and life in general than you ever have before. This is an amazing time to see and do everything you can. Take it all in and enjoy yourself. In my opinion, what you learn about yourself and life is more important than what you will learn in the classroom (but that doesn’t mean what you learn in the classroom isn’t important!). Take it all in and see and do as much as you can. You only get this chance once.