Is your teenager planning to get a job this summer? About one-third of individuals between ages 16 and 19 work during their summer break, according to the Pew Research Center. But what do they need to know about the financial side of life in the workforce? The Pennsylvania Institute of Certified Public Accountants (PICPA) gets teen workers and their parents up to speed on income taxes and summer employment.
Plan for Income Taxes
Students may hear a lot about taxes at the dinner table or in the news, but a summer job will likely be their first experience in actually paying taxes. As a result, they may be surprised when they receive their first paycheck and find that it’s not quite as much as they expected. If they have big dreams for using or saving the money they earn, it’s important that they know how much money they’ll actually take home and how much will be withheld each week so they can plan accordingly.
Get the Information You Need
Employers generally ask every worker—including temporary summer help—to fill out a federal Form W-4 , state Form W-4 (if applicable) and local residency certification form which gathers information about them and is used to calculate the amount of federal, state and local income taxes that should be withheld from every paycheck. Even if the employee doesn’t earn enough to owe federal, state and local income taxes, employers typically must withhold Social Security and Medicare taxes. An employee’s first paycheck, which should detail how much is being withheld for various taxes, will provide a great deal of information and make it easier to budget for the rest of the summer.
Tips Are Taxable Too
If a teenager’s summer job includes tips, they should keep a daily record of all cash tips received and report their total cash tip income of $20 or more in any month to their employer. The tips they earn during the year must be reported on their income tax return, as well.
Expect Taxes Even If Self-Employed
Self-employed entrepreneurs who spend the summer doing things like running a landscaping business, selling products online, or doing tech consulting may need to make quarterly estimated tax payments based on their earnings. They should be sure to keep thorough records and receipts so that they can track their income and estimate their quarterly income tax bill, as well as qualify for deductions that might lower their total taxable income and any taxes they owe.
Know Whether to File or Not
If a teenager can be claimed as a dependent on someone else’s tax return, they generally don’t have to file a federal return if their total earned income for the year was less than $12,000 for 2018 (this excludes those who were self-employed since they would have to file Social Security taxes due). That may be more than many summer workers make, but there may be some situations in which filing a return is a good idea. One clear situation is if taxes were withheld from the summer employee’s pay and they are now due a tax refund.
Look for Your W-2
By the end of January following the summer when the student worked, they will receive a Form W-2 from the employer. This form includes important information that they’ll use in preparing and filing their income tax returns.
Your Local CPA Can Help
A summer job is a great way to build up savings for college or other goals and to gain experience in the workforce. If your family has questions about income taxes or any other financial topic, be sure to turn to your local CPA. They can address all your important financial concerns. To find a CPA in your area or for more financial tips, visit www.picpa.org/moneyandlife
Originally published June 4, 2017