If your teenager is working a summer job, it’s important to know which tax filings may be required and the implications of your child’s income. Children claimed as dependents generally do not need to file a tax return unless they earned more than the standard deduction. However, tax rules can vary depending on their type of employment some of which we will cover below.
If your child has a summer job at a business that is not family owned, they should fill out a Form W-4. If they did not have federal tax liability for the previous year and expect to have no federal tax liability for the current year, they can claim an exemption from federal income tax withholdings on the W-4. Unless your child expects to earn more than $12,950, or the standard deduction for 2022, they can claim exemption and should not have to file a tax return. If your child does not claim exemption and their employer withholds federal income taxes, filing the return could result in a withholding refund. It’s important to note that even if a child is exempt from federal income tax withholding, it does not mean they aren’t subject to FICA taxes. Expect employers to withhold Social Security and Medicare taxes, also known as FICA, from their paycheck.
Having your teenager as an employee of the family business can provide payroll tax benefits. If your business is a sole proprietorship or an LLC where you employ your child (under age 18), wages may be exempt from FICA withholding. If your business is a partnership, you may be eligible for FICA exemption as long as the business partners are the child’s parents (if you have a non-parent business partner, you will not qualify for this exemption). Additionally, payments to your child under age 21 are not subject to federal unemployment (FUTA) taxes.
Hiring your child also provides your family tax benefits. Your child’s pay is deductible, reducing your taxable income and possibly your self-employment taxes. Because of the standard deduction, your child will not have to pay federal taxes on most, if not all, of their earnings. Your child must work for your business and be paid as a legitimate employee for this to apply. For example, you own a sole proprietorship, hire your child for the summer, and pay them $5,000. Their compensation reduces your taxable income by $5,000, and because it’s less than the standard deduction of $12,950 it is not subject to federal income taxes. You also do not have to contribute to FICA or FUTA if your child meets the age requirements.
Taxation is slightly more complicated if your child performs independent work as a summer job, like mowing lawns or tutoring. While the standard deduction still applies for federal income tax purposes, their income will be subject to self-employment tax.
When employed by a typical company, the employer and employee each pay Social Security and Medicare taxes (FICA) of 7.65%. However, if your child is self-employed, they will need to pay self-employment tax or the combined FICA tax amount of 15.3%. They should keep accurate income records and pay the 15.3% self-employment tax on any profits over $400. Many self-employed individuals, including children, must file and pay quarterly estimated taxes. If your child expects to owe at least $1,000 in taxes for 2022, they may need to pay quarterly estimated taxes. However, they will not need to make estimated tax payments for the current year if:
Form 1040-ES, Estimated Tax for Individuals, can help determine whether your child will need to pay quarterly estimated taxes and how much they will have to pay.
If your child has a summer job in a private residence performing domestic chores such as babysitting, cleaning or gardening, their work may trigger the IRS’s household employee rule (or “nanny tax”). A worker is deemed a household employee if the employer “controls not only the work they do but also how they do it.” However, individuals who provide services as independent contractors do not qualify. Household employees are exempt from FICA withholding if they are (a) the employer’s child under age 21 or (b) a child under age 18 at any time during the year. Their employer is also not required to withhold federal income tax paid to a household employee.
While paying taxes can be daunting, it’s a great learning opportunity for your child. This is just an overview of tax considerations for a child’s earnings- not a substitute for speaking with one of our expert tax advisors. Please contact us if you have questions or need assistance with your child’s taxes. We’d be happy to discuss your unique situation and how we may be of service.