Got a Summer Job? Tax Tips for your Summer Job

Teenage girl working in cafe; Shutterstock ID 249222916; PO:

Summertime living is supposed to be easy, but for those who take seasonal jobs the taxes can be tricky.

Now is a good time for a checkup if you are a student with a summer job or have a young worker in the family.

“Some children’s returns are almost as complex as their parents’, even though they don’t have much income,” says Ken Rubin, a certified public accountant with RubinBrown in St. Louis.

One common complication is the need for multiple state returns if a child’s home is in one state, a college or on-campus job is in another and a summer job is in a third.

Slip-ups can mean aggravation later or lost opportunities, so here are tax tips for summer earners.
Know the basics. For many young workers who are dependents—meaning that someone else provides more than half their support—the threshold for federal income tax in 2016 will be $6,300 of earned income. That’s the amount of the standard deduction.

Employees typically owe 7.65% in Social Security and Medicare tax on all earned income, while self-employed workers generally owe 15.3% for these levies on earned income above about $430, according to Troy Lewis, a CPA who practices in Draper, Utah.

If the employee is your child. Parents who hire children under 18 to work in a sole proprietorship, a spousal partnership or a single-member limited-liability company can deduct the child’s pay, and no payroll taxes are due.

Payroll taxes are due if the child is 18 or older, but children under 21 who are employed by a parent are exempt from federal unemployment taxes and possibly state unemployment taxes as well.

Parents who plan to deduct a child’s pay should pay fair wages for real work, says Mr. Lewis, and be sure to keep careful records. Many tech-savvy teens have expertise in building or maintaining business websites or marketing via social media.

Check employment status. Young workers may not know whether they are employees or independent contractors, but there’s a big difference. Contractors don’t have income or payroll taxes withheld, so these workers could have a surprise tax bill if a 1099 form arrives next spring.

Independent contractors should also track deductible expenses for mileage, special uniforms or equipment used in their work, says Mr. Lewis, because such expenses can be hard to reconstruct.

Take care with the W-4. If an employee won’t have taxable income for 2016, the W-4 form should say “exempt” on line 7, to avoid having to file a return next spring. Payroll taxes due will still be withheld.

Consider shifting an education tax break. Last year, Congress made permanent the American Opportunity Tax Credit, which is often the best college tax break. Those claiming it can use up to $4,000 of college expenses for tuition, books and equipment to reduce their income taxes by as much as $2,500.

The catch: This benefit isn’t available to most couples who have more than $160,000 of adjusted gross income or singles with more than $80,000.

If the parents have too much income to claim the American Opportunity Credit for college costs, the young worker may be able claim it instead, says Mr. Rubin, even if the employee is still a dependent of his or her parents. Often families are unaware of this option, according to Mr. Rubin.

In this case, neither the parents nor the child claim the personal exemption for the child. This benefit may be of little value to the parents because of a phaseout for affluent taxpayers.

The student then claims the American Opportunity Credit on his or her own return, which offsets up to $2,500 of taxes. The student doesn’t have to pay the college costs to use this benefit.

Mr. Rubin adds that the credit can apply to the student’s “unearned” income (as from investments or a trust) as well as his or her earned income, even if the unearned income is taxed at the parents’ rate due to a provision known as the “kiddie tax.”

Fund an IRA. Summer workers can contribute their earned income up to $5,500 this year to either a traditional or a Roth individual retirement account. Assets in either account compound tax free.

Contributions to a traditional IRA are tax deductible, but withdrawals are taxable, whereas Roth contributions aren’t deductible, but withdrawals are often tax free. Given the low tax rates of young workers, a Roth IRA is often the better choice.

Helping a child or grandchild fund an IRA can be a terrific gift. “Often, starting the account is the hardest part,” says Mr. Lewis. “Once it’s up and going, it’s easy to put in more.”