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!